Imperfect pass-through to deposit rates and monetary policy transmission

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 30 July 2021

Staff Working Paper No. 933

By Alberto Polo

I document three salient features of the transmission of monetary policy shocks: imperfect pass-through to deposit rates, impact on credit spreads, and substitution between deposits and other bank liabilities. I develop a monetary model consistent with these facts, where banks have market power on deposits, a duration-mismatched balance sheet, and a dividend-smoothing motive. Deposit demand has a dynamic component, as in the literature on customer markets. A financial friction makes non-deposit funding supply imperfectly elastic. The model indicates that imperfect pass-through to deposit rates is an important source of amplification of monetary policy shocks.

Imperfect pass-through to deposit rates and monetary policy transmission

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