A model of retail banking and the deposits channel of monetary policy

We develop a dynamic, search-theoretic model of bank deposits markets where relationships are bilateral, the demand for liquid assets is microfounded, and consumers are privately informed about their liquidity needs. As the policy rate rises, the deposit spread widens, and aggregate deposits shrink, in accordance with the deposits channel documented in Drechsler et al. (2017). The deposit outflow originates from consumers in the lower percentiles of the distribution of deposits. As banks become more informed about consumers' types (e.g., through big data), their market power increases but transmission weakens. As entry costs are reduced (e.g., through online banking), market power shrinks and transmission weakens.