Deposit Channel of Monetary Policy in European Countries

Abstract

This paper focuses on the first link of the monetary transmission mechanism – interest rate channel. It forks on two subchannels: credit vein and deposit vein. We will investigate the second one, i.e. the impact of the discount (also key, reference) rate of a central bank on the deposit policy of commercial banks. Deposit channel is a very rarely treated as a separate line of the monetary policy from the credit channel. On the basis of VAR analysis of monthly data over several-years period on the banking system of Ukraine, Poland, and Montenegro we found out a tendency of the discount rate to impact banks’ deposit rates changes with some lag of time. The tightest liaison between these indicators is observed during the periods of discount rate stability and sloping down. However, sensitivity of banks‘ deposit rates is lost when the discount rate is rapidly increased during the periods of restrictive monetary policy. It was defined that the essential reason for such picture is an extra liquidity of the banking system. On the one hand, it symbolizes the soundness of banking system, while from the other it makes more difficult for a central bank policy to absorb extra liquidity from the market to reduce pressure on prices. The paper contains some thoughts for increasing effectiveness of restrictive monetary policy in such periods.