Interest Rate Pass-Through and Consumption Response: The Deposit Channel

Sumit Agarwal, Souphala Chomsisengphet, Yildiray Yildirim and Jian Zhang
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Sumit Agarwal: National University of Singapore
Souphala Chomsisengphet: Office of the Comptroller of the Currency
Jian Zhang: University of Hong Kong

The Review of Economics and Statistics, 2021, vol. 103, issue 5, 922-938

Abstract: This study assesses a new mechanism, the deposit channel, in the transmission of interest rate shock to household consumption using an administrative panel data set of financial transactions for Turkey. Our empirical strategy exploits variation in consumers' adherence to the Islamic laws that forbid earning interest and employs a standard difference-in-difference design. Following an unanticipated announcement of interest rate hike, rate-sensitive consumers significantly reduce their overall spending, and the response persists throughout the post-announcement period. The response of debt payment, disparate exposure to inflation, exchange rate, and the demographic difference can hardly fully account for the documented consumption response heterogeneity.

Date: 2021
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