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

Abstract

We develop a dynamic, search-theoretic model of bank deposit 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). We show that the deposit outflow originates from consumers with low liquidity needs. As banks become more informed about consumers' types (e.g., through big data), their market power increases but transmission weakens. As search frictions are reduced (e.g., through online banking), market power shrinks and transmission weakens.

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