Why Do People Hold Deposits?
36 Pages Posted: 15 Apr 2022 Last revised: 11 May 2022
Date Written: May 11, 2022
We provide the first comprehensive tests in the household finance literature of why individuals invest in deposits, for many their largest and sometimes only financial asset. Our findings are threefold. Using detailed register data covering every individual in Denmark we first show that people actively readjust their deposits following an exogenous increase, as captured by unexpected inheritances. Second, we find that people use deposits and voluntary unemployment insurance as substitutes. Finally, interest rates paid on deposits do not drive deposit demand. Collectively, these results support that people hold deposits primarily for precautionary reasons.
Keywords: household finance, bank deposits, liquidity management, precautionary savings
JEL Classification: G11, G51
Suggested Citation: Suggested Citation