Download This PaperIn Search of a Risk-Free Asset: Search Costs and Sticky Deposit Rates
60 Pages Posted: 23 Apr 2012 Last revised: 16 May 2018
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In Search of a Risk-Free Asset: Search Costs and Sticky Deposit Rates
In Search of a Risk-Free Asset
Date Written: May 13, 2018
Abstract
To attract time deposits, more than 6,000 banks post their offer rates. I document a large cross-sectional dispersion, negative spreads over Treasuries, and upward rigid adjustments in these rates following federal funds rate increases. Estimates of an oligopoly model reveal a large fraction of high-search-cost and a small declining fraction of low-search-cost investors that can rationalize the observed pricing. Despite high intertemporal elasticity of substitution and technological innovations over the last two decades, the stable large fraction of high-search-cost depositors, mostly elderly households, grants banks significant monopoly power and allows for the sluggish pass-through of increases in the federal funds rate into deposit rates.
Keywords: Deposit rates, Search Costs, Rate rigidity, Rate dispersion, Interest rate pass-through, Coefficient of intertemporal elasticity of substitution, Bank-affiliated money market mutual funds, Limited deposit insurance
JEL Classification: D83, D91, G12, G21
Suggested Citation: Suggested Citation
Vladimir Yankov (Contact Author)
Board of Governors of the Federal Reserve System ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
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