Is a Deposits Channel Relevant for Monetary Policy in Australia?

Abstract

Despite the implications on monetary policy transmission and financial stability, there has been no literature on a deposits channel of monetary policy transmission in Australia. This thesis investigates the existence of a deposits channel in Australia using a structural vector auto-regressive (SVAR) model with sign restrictions, an approach that is novel in the deposits channel literature. In terms of results, I find no evidence of a deposits channel. I find that, in fact, when the sample period is limited to the inflation targeting regime period, deposits increase in response to a contractionary monetary policy shock which is more consistent with an intertemporal substitution channel rather than a deposits channel. There are two main implications of these results which are relevant to the current Australian economic environment. The first is that policy makers should not be concerned about the impact of monetary policy on bank funding. The second is that policy rate setters do not need to consider the impact of a deposits channel when setting the cash rate in Australia.