Household Income Shocks, Demand for Deposits, and Real Activities
54 Pages Posted: 8 Nov 2021 Last revised: 3 Jul 2022
Date Written: October 1, 2021
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: Suggested Citation