DP15553 The Deposits Channel of Monetary Policy: A Critical Review

Author(s): Rafael Repullo
Publication Date: December 2020
Keyword(s): banks' market power, deposits channel, monetary policy transmission
JEL(s): E52, G21, L13
Programme Areas: Financial Economics, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15553

Drechsler, Savov, and Schnabl (2017) claim that increases in the monetary policy rate lead to reductions in bank deposits, which account for the negative effect on bank lending. This paper reviews their theoretical analysis, showing that the relationship between the policy rate and the equilibrium amount of deposits is in fact U-shaped. Then, it constructs an alternative model, based on a simple microfoundation for the households' demand for deposits, where an increase in the policy rate always increases the equilibrium amount of deposits. These results question the theoretical underpinnings of the "deposits channel" of monetary policy transmission.