Silvana Tenreyro

Monetary asmmetries without (and with) price stickiness

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Venerdì, Aprile 19, 2024
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Key Points: 

    Deposit market concentration and monetary transmission: evidence from the euro area

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    Domenica, Febbraio 4, 2024
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    Abstract

    Key Points: 
      • Abstract
        I study the transmission of monetary policy to deposit rates in the euro area with a
        focus on asymmetries and the role of banking sector concentration.
      • Moreover, the
        gap between deposit rates across euro area member states - despite being exposed to the same
        key ECB interest rates - has widened.
      • This begs the question whether deposit rates are more
        sluggish in response to both policy rate increases and cuts, and what factors might influence the
        transmission of monetary policy to deposit rates.
      • Whether banks are indeed able to adjust deposit rates asymmetrically to positive and
        negative changes in policy rates could thus well depend on how much market power they hold
        in the deposit market.
      • Arguing that market power increases in the degree of market concentration,
        I further consider whether more concentrated banking sectors set rates (more) asymmetrically.
      • The response of deposit rates in banking sectors with an average degree of concentration does
        not appear asymmetric.
      • The degree of market concentration is often pointed at, but recent evidence
        for the euro area is scarce.
      • In this paper, I provide empirical evidence on the asymmetric response of deposit rates to
        monetary policy, and relate this to the degree of concentration within a country?s banking sector.
      • Both papers
        provide empirical evidence based on US deposit markets showing that deposit rates respond
        more rigidly to upward changes in market rates than downward changes, especially so in more
        concentrated markets.
      • Recent research on euro area deposit markets,
        instead, has focused more on the transmission of negative policy rates (see e.g.
      • Whether banks are able to set deposit rates that materially differ from policy rates is affected

        ECB Working Paper Series No 2896

        4

        by market concentration: market power is assumed to increase in the degree of concentration in
        the banking sector.

      • Concentration thus appears to matter for how quickly ECB monetary policy has
        been transmitted to deposit rates across the euro area.
      • Banks thus have a motive to be
        rigid in adjusting deposit rates to a ?positive? monetary policy shock.
      • While customers are generally (and potentially rationally) inattentive, swift and substantial
        nominal deposit rate declines may trigger deposit outflows.
      • relative deposit rate = deposit rate - short term rate
        The inverse of the wedge, the relative deposit rate will allow us to see more clearly how
        the deposit rate evolves in comparison to the short-term rate.
      • This then translates to (more
        pronounced) effects on the transmission of policy to the deposit wedge, reinforcing the asymmetry discussed before.
      • More concentration would mean more rigid deposit rates (and thus an
        increase in the deposit wedge) in case of positive surprises, and more flexible deposit rates (and
        thus a decrease in the deposit wedge) in case of negative surprises (see also e.g.
      • I add an identical
        altered-linex adjustment cost for deposit rates, to capture the upward rigidity and downward
        flexibility of deposit rates as well.
      • As discussed
        previously, the deposit rate is particularly rigid in case of a positive shock, illustrating the dividend smoothing motive and bank market power.
      • Without the asymmetric adjustment cost,
        the response of the deposit rates to positive and negative changes in policy would have been
        symmetric.
      • This appears a reasonable assumption
        in general, as market concentration or market shares are slow-moving concepts.
      • 3

        Methods and data

        I study the dynamic response to an unexpected change in monetary policy on deposit rates
        in different countries in the euro area.

      • deposit rate - short-term rate), which for the sake of
        brevity I will refer to as the ?relative deposit rate?.
      • Positive IRFs for the relative deposit rate imply that
        the deposit rate has increased by more than the short-term rate, narrowing the wedge between
        the short-term rate and the deposit rate.
      • 0
        ?2

        ?2
        ?4
        ?6

        ?4
        4

        8

        12

        4

        Months

        8

        12

        Months

        Figure 9: NFC rate response - linear combination of ?0 and ?1

        Relative deposit rate at 1 month

        Relative deposit rate at 4 months

        0.0

        0
        ?1

        p.p.

      • 0
        0

        ?2
        ?1
        ?4
        4

        8

        12

        4

        8

        Months

        12

        Months

        Figure 12: NFC rate response - linear combination of ?0 and ?1

        Relative deposit rate at 1 month

        Relative deposit rate at 4 months
        2.0

        1.5

        p.p.

      • And, (2) how quickly
        households and NFCs learn about changes in monetary policy, via the deposit rate, may vary
        across the monetary union.
      • ?0 , ?1 )
        Figure A16: NFC overnight deposits, small member states

        Relative deposit rate (average)

        Relative deposit rate (interaction)

        2

        10
        5

        p.p.

      • ?0 , ?1 )
        Figure A19: NFC overnight deposits, four lags

        Relative deposit rate (average)

        Relative deposit rate (interaction)
        5

        0

        p.p.

      • ?0 , ?1 )
        Figure A28: NFC overnight deposits, small member states

        Relative deposit rate (average)

        Relative deposit rate (interaction)

        3

        5.0

        2

        2.5

        p.p.

      • ?0 , ?1 )
        Figure A31: NFC overnight deposits, four lags

        Relative deposit rate (average)

        Relative deposit rate (interaction)

        3
        2

        p.p.