Household Income Shocks, Demand for Deposits, and Real Activities

54 Pages Posted: 8 Nov 2021 Last revised: 3 Jul 2022

See all articles by Tanmoy Majilla

Tanmoy Majilla

Indian Institute of Management Ahmedabad

Abhiman Das

Indian Institute of Management Ahmedabad

Date Written: October 1, 2021

Abstract

This article investigates the effect of household income shocks on demand for deposits and its potential impacts on lending and real activities. Leveraging a proprietary panel of the bank-branch population in India and regional heterogeneity in income shocks, we make three main contributions. First, we find that both savings and term deposits adjust downward at the intensive margin to an exogenous household income shock proxied by rainfall fluctuation at 0.5°X0.5° resolution, but non-responsive at the extensive margin. Thus, a higher interest rate or exit barrier that term deposits feature cannot fully prevent deposit outflow. The negative effects are correlated with the agricultural intensity of the region. Second, term deposits are sticky upward, i.e., they do not respond to a positive shock. In contrast, savings do adjust. This is because households reallocate their portfolio towards real assets and riskier financial instruments in response to a positive shock. Moreover, cross-sectional deposit outflows lead to an economically important contraction in lending and nightlight-based economic activities, indicating a novel deposit channel of the regional business cycle.

Keywords: deposits, banking, household finance, business cycle, credits, India

JEL Classification: G21, G5, E21, E44, O16

Suggested Citation

Majilla, Tanmoy and Das, Abhiman, Household Income Shocks, Demand for Deposits, and Real Activities (October 1, 2021). Available at SSRN: https://ssrn.com/abstract=3958217 or http://dx.doi.org/10.2139/ssrn.3958217

Tanmoy Majilla (Contact Author)

Indian Institute of Management Ahmedabad ( email )

Vastraour
Ahmedabad, 380015
India

Abhiman Das

Indian Institute of Management Ahmedabad ( email )

Vastraour
Ahmedabad, 380015
India

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