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In Search of a Risk-Free Asset: Search Costs and Sticky Deposit Rates

39 Pages Posted: 23 Apr 2012 Last revised: 5 Nov 2017

Vladimir Yankov

Federal Reserve Board

Multiple version iconThere are 2 versions of this paper

Date Written: November 2, 2017

Abstract

To attract time deposits, more than 6,000 banks post their offer rates. I document large and persistent cross-sectional dispersion, on average negative spreads over Treasuries, and asymmetric rigid adjustments in these rates. Estimates of an oligopoly model reveal a large fraction of high search cost investors, and a small declining fraction of low search cost investors. Despite estimates of high intertemporal elasticity of substitution and recent technological innovations, the non-declining fraction of high search cost depositors, likely 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: Consumer search, Price rigidity, Deposit rates, Interest rate pass-through

JEL Classification: D83, D91, G12, G21

Suggested Citation

Yankov, Vladimir, In Search of a Risk-Free Asset: Search Costs and Sticky Deposit Rates (November 2, 2017). Available at SSRN: https://ssrn.com/abstract=2044882 or http://dx.doi.org/10.2139/ssrn.2044882

Vladimir Yankov (Contact Author)

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