Date: 2006
Type: Working Paper
How the Removal of Deposit Rate Ceilings Has Changed Monetary Transmission in the US: Theory and Evidence
Working Paper, EUI ECO, 2006/34
MERTENS, Karel, How the Removal of Deposit Rate Ceilings Has Changed Monetary Transmission in the US: Theory and Evidence, EUI ECO, 2006/34 - https://hdl.handle.net/1814/6399
Retrieved from Cadmus, EUI Research Repository
Establishing the existence and nature of changes in the conduct and transmission of
monetary policy is key in understanding the remarkable macroeconomic performance of the
US since the mid 1980s. This paper presents evidence on a phenomenon of disintermediation
occurring during the major recessions in the 1960s and 1970s, but absent ever since. Using
a novel data set, I show that disintermediation is closely linked to the existence of deposit
rate ceilings under regulation Q. In a monetary DSGE model that incorporates deposit
rate ceilings as occasionally binding constraints, the regulation alters the behavior of money
aggregates and exacerbates the drop in economic activity following a monetary tightening.
The results of a time-varying coe±cient VAR lend support to the main theoretical predictions
of the model. In a counterfactual experiment, the presence of deposit rate ceilings explains
two thirds of the decline in output volatility since the early 1980s.
Cadmus permanent link: https://hdl.handle.net/1814/6399
ISSN: 1725-6704
Series/Number: EUI ECO; 2006/34
Publisher: European University Institute