Abstract

This paper studies how income and wealth heterogeneity shape deposit rate determination and the transmission of monetary policy through the banking sector. I develop an incomplete markets model with imperfect banking competition and idiosyncratic bank preferences, in which banks' market power depends on the wealth distribution of its customer base. Unlike standard representative-agent frameworks, depositor heterogeneity in income, wealth, and preferences for bank characteristics generates heterogeneous deposit supply elasticities, linking the wealth composition of a bank’s customer base to its pricing behavior. I show that micro-level elasticities are non-monotonic in both wealth and deposit rates, as the intensive and extensive margins of deposit supply respond in opposite directions. This heterogeneity produces state-dependent and composition-driven dynamics in aggregate deposit supply elasticities, giving rise to non-linear pass-through from policy to deposit rates.

Abstract

Enhanced access to administrative data has provided new insights into wage and earnings changes and labor input adjustments. In particular, there is mounting evidence supporting the notion of (nominal) wages being downwardly rigid and pointing towards an allocative effect of wages on both working hours and employment. This paper aims at reconciling these empirical findings within a parsimonious search and matching model with labor input adjustments along the intensive and extensive margin. I show that an ad-hoc constraint on the extent of permissible wage cuts can explain the asymmetric decomposition of earnings changes into hours and wage changes observed in the data.