Asymmetric Effects of Monetary Policy on Commercial Banks Deposits in Iraq

Abstract

This study propose and test a new channel for the transmission of monetary policy, when monetary policy changes banks respond to the interest they charge on deposits and affects directly on the size of banks deposits and, thus, affects lending power of commercial banks. Given this issue in mind, this study examines the asymmetric effects of monetary policies on commercial banks deposits in Iraq. The study applied Unit root test, Nonlinear autoregressive distributed lag (NARDL) approach, Error correction model (ECM), Bound test and Wald test using monthly data spanning from Jan 2005 to Dec 2019. Policy Interest Rate (IR), Cash Reserve Requirement (RR), and Broad Money Supply (M2) were used to proxy the monetary policies. Bank Deposit (BD), were used as the proxy of the Iraqi commercial banks deposit. The findings of NARDL show a non-linear relationship between monetary policies and Banks deposit. Furthermore, the results of Bound test and ECM confirmed the existence of the long run and short run relation between monetary policies and commercial banks deposit in Iraq. Finally, the result of Wald test indicates that policy interest rate and reserve requirement has asymmetric effect on banks deposit, while money supply has symmetric effect. Hence, it is suggested that policy makers in Iraq should consider the positive and negative shocks of monetary policy as commercial banks respond asymmetrically to the monetary policy Instruments.