Interest Rate Pass-Through and Consumption Response: the Deposit Channel

68 Pages Posted: 9 Feb 2017 Last revised: 24 Apr 2020

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

The University of Hong Kong - Faculty of Business and Economics

Date Written: March 25, 2020

Abstract

This study assesses a new mechanism – the deposit channel – in the transmission of interest rate shock to household consumption using an administrative panel dataset of financial transactions for Turkey. Our empirical strategy exploits variation in consumer’s adherence to the Muslim laws that forbid earning interest and employs a standard difference-in-difference design. Following an unanticipated announcement of interest rate hike, rate-sensitive consumers significantly reduce their overall spending each month by 8.58 percent on average in the subsequent six months. The response persists throughout the post-announcement period and is much stronger among consumers with a higher level of liquid assets and who are relatively aged. The negative consumption response to the unanticipated policy shock is primarily concentrated in non-durable and discretionary spending. We show that the response of debt payment, disparate exposure to inflation, and exchange rate, the demographic difference can hardly fully account for the documented consumption response heterogeneity. Last, our estimate of the elasticity of intertemporal substitution indicates that the magnitude is economically small.

Keywords: Interest Rate Shock, Consumption, Big Data, Household Finance, Banking

JEL Classification: D12, D14, E52

Suggested Citation

Agarwal, Sumit and Chomsisengphet, Souphala and Yildirim, Yildiray and Zhang, Jian, Interest Rate Pass-Through and Consumption Response: the Deposit Channel (March 25, 2020). 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

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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