The Geography of Bank Deposits and the Origins of Aggregate Fluctuations

Abstract

What are the aggregate effects of deposit shocks? Using the granular-instrumental-variable methodology, we identify the deposit elasticity of economic growth to be 1.49 and the money multiplier to be 1.26. We construct deposit shocks by combining the within-bank geographic concentration of deposits - where at least 30% of deposits are concentrated in a single county - with local natural disasters. Natural disasters in deposit-concentrated areas negatively affect bank deposits and amplify through bank internal capital markets. These shocks can explain 5.80% of the variation in economic growth. Lender and borrower-side frictions are critical for the aggregation of local shocks.

Keywords: deposit concentration, idiosyncratic shocks, aggregate fluctuations, economic growth, banks, small business lending, mortgage, funding shocks, deposit shocks, natural disasters, climate change, GIV

JEL Classification: G21, E44, O47, R11, R12