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A model of retail banking and the deposits channel of monetary policy

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  • Choi, Michael
  • Rocheteau, Guillaume

Abstract

We develop a dynamic, search-theoretic model of bank deposits markets where relationships are bilateral, the demand for liquid assets is microfounded, and consumers are privately informed about their liquidity needs. As the policy rate rises, the deposit spread widens, and aggregate deposits shrink, in accordance with the deposits channel documented in Drechsler et al. (2017). The deposit outflow originates from consumers in the lower percentiles of the distribution of deposits. As banks become more informed about consumers’ types (e.g., through big data), their market power increases but transmission weakens. As entry costs are reduced (e.g., through online banking), market power shrinks and transmission weakens.

Suggested Citation

  • Choi, Michael & Rocheteau, Guillaume, 2023. "A model of retail banking and the deposits channel of monetary policy," Journal of Monetary Economics, Elsevier, vol. 139(C), pages 127-147.
    • Handle: RePEc:eee:moneco:v:139:y:2023:i:c:p:127-147
    DOI: 10.1016/j.jmoneco.2023.06.010
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    More about this item

    Keywords

    Banking; Money; Search; Market power; Deposits channel;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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