Deposit Market Deregulation, Implicit Deposit Rates, and Monetary Policy

This paper uses a model of oligopolistic rivalry in bank deposit markets to consider the implications of deposit rule deregulation and increased bank competition for bank behavior, financial market outcomes, and monetary policy. In the context of this model, it is argued that the key determinant of the amount of implicit interest paid on deposits is the amount of monopoly power available to banks, rather than the presence of or absence of ceilings on explicit deposit rates. In additon, the microeconomic framework is used as a foundation for a simple general equilibrium investigation of the implications of deposit market deregulation for market interest rates and the quantity of deposit money under alternative Federal Reserve operating procedures.