The Deposits Channel Revisited
18 Pages Posted: 29 Jan 2021
Date Written: December 10, 2020
Drechsler, Savov, and Schnabl (2017) present a novel reformulation of the bank lending channel of monetary transmission based on market power in local deposits markets, which they term the deposits channel. In this paper we perform a successful narrow replication. We then further their study by reconciling their results on lending with two strands of related literature. First, recent studies have pointed out the unique dynamics of credit card loans in Community Reinvestment Act loan origination data. When accounting for this heterogeneity, we find some key results are sensitive to the inclusion of credit card banks. This confirms the importance of accounting for credit card loans when using CRA data. Second, we show that inconsistencies with related empirical studies can be explained by differences in market power measure, sample period, and the inclusion of alternative control variables. These results highlight that market power on opposing sides of bank balance sheets can impact monetary transmission through alternative channels.
Keywords: Monetary policy, bank lending channel, market power
JEL Classification: E44, E52, E58, G21
Suggested Citation: Suggested Citation