Affiliation:
1. Banque de France, 31 rue Croix des Petits-Champs, 75049 Paris cedex 01, France
Abstract
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.
Publisher
Oxford University Press (OUP)
Subject
Economics and Econometrics
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