Interest Rate Pass-Through and Consumption Response: The Deposit Channel

Abstract

This study assesses a new mechanism — the deposit channel — in the transmission of interest rate shock to household consumption using an administrative panel dataset of financial transactions for Turkey. Our empirical strategy exploits variation in consumer's adherence to the Muslim laws that forbid earning interest and employs a standard difference-in-difference design. Following an unanticipated announcement of interest rate hike, rate-sensitive consumers significantly reduce their overall spending and the response persists throughout the post-announcement period. The response of debt payment, disparate exposure to inflation, and exchange rate, the demographic difference can hardly fully account for the documented consumption response heterogeneity.