Cash Demand and Consumption Response to Unanticipated Monetary Policy Shock: Evidence from Turkey

Posted: 9 Feb 2017 Last revised: 5 Aug 2018

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York

Jian Zhang

Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences

Date Written: June 25, 2017

Abstract

We study the impact of an unanticipated interest rate policy shock on cash demand and consumption using an administrative panel dataset of financial transactions from Turkey. In response to the unanticipated policy announcement, consumers significantly reduce their monthly ATM withdrawal amount by 92 lira or 5.67 percent on average in the subsequent six months. The difference-in-difference estimate implies an even higher response among treated group relative to the counterfactual and the response is achieved mainly through fewer ATM visits. The differential effect on cash demand persists throughout the post-announcement period and is much stronger among consumers who are less liquidity-constrained and have stable income. Our difference-in-difference analysis also shows a negative consumption response to the unanticipated policy shock that is primarily concentrated in non-durable and discretionary spending. Both the cash demand and consumption response results are consistent with theory. The estimate of the interest rate elasticity, using either the monetary policy shock or classic money demand specification, are comparable with those in the literature. The welfare cost of inflation is moderate and varies across subsamples.

Keywords: Cash Demand, Interest Shock, Liquidity Constraint, Consumption, Big Data, Household Finance

JEL Classification: D12, D14, E43

Suggested Citation

Agarwal, Sumit and Chomsisengphet, Souphala and Yildirim, Yildiray and Zhang, Jian, Cash Demand and Consumption Response to Unanticipated Monetary Policy Shock: Evidence from Turkey (June 25, 2017). Georgetown McDonough School of Business Research Paper No. 2913973. Available at SSRN: https://ssrn.com/abstract=2913973 or http://dx.doi.org/10.2139/ssrn.2913973

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street, SW
Washington, DC 20219
United States
202-649-5533 (Phone)

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

Jian Zhang

Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences ( email )

Hong Kong

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