Q2. What is the effect of the Fed funds rate on deposits?
since checking and savings deposits are much larger than small time deposits, the net effect is that total core deposits shrink.
Q3. What is the elasticity of substitution between wealth and liquidity services?
The representative household maximizes utility over final wealth, W , and liquidity services, l, according to a CES aggregator:u (W0) = max ( W ρ−1 ρ + λl ρ−1 ρ ) ρ ρ−1 , (1)where λ is a share parameter, and ρ is the elasticity of substitution between wealth and liquidity services.
Q4. how does the spread of a bank affect the overall cost of deposits?
Using the fact that s captures the overall cost of deposits D, the authors can show that in asymmetric equilibrium the elasticity of demand for bank i’s deposits is given by∂Di/Di ∂si/si = 1 N( ∂D/D∂s/s) − η ( 1− 1N) .
Q5. What is the effect of a higher interest rate on deposits?
In response to an increase in the rate f banks(i) reduce deposits D,(ii) increase wholesale funding H, and(iii) reduce lending L.As in the baseline model, a higher interest rate increases banks’ effective market power and induces them to contract deposit supply (the second term on the right of (14) is more negative).
Q6. how do the authors solve elasticity of demand for deposits?
The authors can do so in closed form by letting λ → 0, which removes the impact of the cost of liquidity on total wealth and simplifies the resulting expression:−∂D/D ∂s/s =[ 11 + δ ( f s) −1 ] + [ δ ( f s ) −1 1 + δ ( f s ) −1 ] ρ. (8)Equation (8) shows that households’ elasticity of demand for deposits is equal to a weighted average of their elasticity of substitution to cash, , and bonds, ρ.
Q7. What is the average population of low-concentration counties?
The authors find that low-concentration (low HHI) counties are larger than high-concentration (high HHI) counties, with an average population of 150,081 versus 28,717.
Q8. How much does the spread between the Fed funds rate and the deposit rate increase?
For every 100 bps increase in the Fed funds rate, the spread between the Fed funds rate and the deposit rate increases by 54 bps.
Q9. What is the elasticity of substitution across banks?
It is straight-forward to extend the model to allow for9they are substitutes, hence > 1.Deposits are themselves a composite good produced by a set of N banks:D =( 1N N∑ i=1 D η−1 η i) η η−1, (3)where η is the elasticity of substitution across banks.