Work in progress

Banking Derivatives and Macroeconomics

Macroeconomic Effects of Banking Dividend Policies 

Working paper

Bank Margins: The Firm Deposit Channel of Monetary Policy (2024). (draft available upon request)

Abstract: Corporate deposits have increased considerably over the past two decades accompanied by a decline in their value when the monetary authority raises interest rates. I propose a new approach to modelling the cost channel of monetary policy based on both empirical facts: bank intermediation margins and corporate cash holding. If firms rely on credits to finance operational costs and hold deposits to alleviate financing constraints, a novel monetary policy transmission channel is defined: The Firm Deposit Channel. This channel helps to account for inflation inertia. When the Central Bank increases the policy rate to stabilise inflation, the deposit spread widens, pushing up the marginal costs of the firms. Thus, the deposit channel dampens part of the conventional demand channel that decelerates inflation and makes monetary policy less effective. A conservative calibration suggests that a 100bps increment in the policy rate generates an inflation response around 60bps less than the textbook New Keynesian model.