Passing Through? Bank Entry and the Deposits Channel

65 Pages Posted: 14 Oct 2020 Last revised: 24 Mar 2021

See all articles by Emilio Bisetti

Emilio Bisetti

Hong Kong University of Science and Technology (HKUST)

Stephen A. Karolyi

Office of the Comptroller of the Currency

Stefan Lewellen

Pennsylvania State University - Department of Finance

Date Written: March 23, 2021

Abstract

We provide causal evidence of the deposits channel of monetary policy transmission in a new
setting, but show that bank entry can reduce or even reverse the relationship between deposit
market structure and monetary policy pass-through. We build a simple model of monetary policy
transmission when deposit market structure is endogenous. In our model, expansionary monetary
policy decreases bank funding costs and stimulates bank entry, which in turn stimulates
aggregate credit provision. Using novel shocks to bank entry barriers, we confirm the model’s
main predictions: the deposits channel exists, but local establishment and employment growth
increase more in response to expansionary monetary policy when bank entry barriers are lower.
Our results suggest that the deposits channel and the effects of expansionary monetary policy are
tamed when bank entry costs are high, as is currently the case.

JEL Classification: G12, G21, G28, E51, E52, E58

Suggested Citation

Bisetti, Emilio and Karolyi, Stephen A. and Lewellen, Stefan, Passing Through? Bank Entry and the Deposits Channel (March 23, 2021). Available at SSRN: https://ssrn.com/abstract=3710500 or http://dx.doi.org/10.2139/ssrn.3710500

Emilio Bisetti (Contact Author)

Hong Kong University of Science and Technology (HKUST) ( email )

Clear Water Bay, Kowloon
Hong Kong

Stephen A. Karolyi

Office of the Comptroller of the Currency ( email )

400 7th Street SW
Washington, DC 20219
United States

Stefan Lewellen

Pennsylvania State University - Department of Finance ( email )

University Park, PA 16802
United States

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