A Model of Retail Banking and the Deposits Channel of Monetary Policy

Abstract

We develop a dynamic, search-theoretic model of bank deposit and loan 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 investigate how the transmission mechanism is affected by market structure and FinTech advances, e.g., online banking, big data. The relation between transmission and market power depends on the source of variation of the latter.