How monetary policy changes bank liability structure and funding cost
Mattia Girotti
Oxford Economic Papers, 2021, vol. 73, issue 1, 49-75
Abstract:
US banks obtain most of their funding from a combination of low-interest deposits and high-interest deposits. Using local demographic variations as instruments for banks’ liability composition, I show that when monetary policy tightens, banks with a larger proportion of low-interest deposits on their balance sheet experience larger increases in their high-interest deposit rate and lend less. This happens because tight monetary policy reduces the supply of low-interest deposits to banks, and banks react by issuing more high-interest deposits. As it is increasingly expensive, that substitution is not complete, and leads to a reduction in lending.
JEL-codes: E44 E50 G21 (search for similar items in EconPapers)
Date: 2021
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Working Paper: How Monetary Policy Changes Bank Liability Structure and Funding Cost (2016) 
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