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Deposit insurance pricing and monetary policy transmission

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  • Billon, Steve
  • Andries, Natalia

Abstract

This paper provides a theoretical model that examines the effect of deposit insurance pricing on the transmission of monetary policy. Banks operate in an environment of monopolistic competition and face uncertain returns on firms’ investment projects. A deposit insurance scheme allows for mispricing relative to the fair premium, whereby under- or overpricing has an implicit subsidy or tax effect on deposits. Mispricing in deposit insurance shifts household portfolio allocation between bonds and bank deposits and creates externalities on monetary policy transmission on bank deposits, loans, bonds, and their respective interest rates. The distortion increases when the coverage of deposit insurance is extended. Conversely, fair pricing ensures the neutrality of deposit insurance on interest rate pass-through.

Suggested Citation

  • Billon, Steve & Andries, Natalia, 2025. "Deposit insurance pricing and monetary policy transmission," Economic Modelling, Elsevier, vol. 153(C).
    • Handle: RePEc:eee:ecmode:v:153:y:2025:i:c:s026499932500313x
    DOI: 10.1016/j.econmod.2025.107318
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    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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