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It explains deposit levels through opportunity cost, the role of interest-rate ceilings before deregulation, and how banks’ speed and degree of adjustment to market rates can change the demand for deposits. The commentary also discusses how these shifts affect interpreting short-run movements in money supply growth.",{"@graph":69,"@context":123},[70,84,106],{"@type":71,"itemListElement":72},"BreadcrumbList",[73,77,79,82],{"item":74,"name":75,"@type":76,"position":8},"https://docshare.wps.com","Home","ListItem",{"item":78,"name":9,"@type":76,"position":14},"https://docshare.wps.com/document/",{"item":80,"name":40,"@type":76,"position":81},"https://docshare.wps.com/document/research-report/",3,{"item":83,"name":65,"@type":76,"position":19},"https://docshare.wps.com/document/deregulation-money-and-the-economy-demand-for-deposits-and-opportunity-cost/325528/",{"url":83,"name":65,"@type":85,"image":86,"author":91,"headline":65,"publisher":94,"fileFormat":97,"inLanguage":63,"description":67,"dateModified":98,"datePublished":99,"encodingFormat":97,"isAccessibleForFree":100,"interactionStatistic":101},"DigitalDocument",{"url":87,"@type":88,"width":89,"height":90},"https://docshare.wps.com/thumbnails/deregulation-money-and-the-economy-demand-for-deposits-and-opportunity-cost/325528.png","ImageObject",300,407,{"name":92,"@type":93},"Liam","Person",{"url":74,"name":95,"@type":96},"DocShare","Organization","application/pdf","2026-10-30","2026-09-21",true,{"@type":102,"interactionType":103,"userInteractionCount":105},"InteractionCounter",{"@type":104},"ViewAction",11,{"@type":107,"mainEntity":108},"FAQPage",[109,115,119],{"name":110,"@type":111,"acceptedAnswer":112},"How does opportunity cost determine the level of bank deposits?","Question",{"text":113,"@type":114},"The level of balances held in deposits is driven by forgone interest on nondeposit instruments. Opportunity cost is measured by the gap between a market rate on a short-term risk-free asset and the rate paid on deposits.","Answer",{"name":116,"@type":111,"acceptedAnswer":117},"Why did interest-rate ceilings affect deposit flows before deregulation?",{"text":118,"@type":114},"Checking accounts were restricted from paying interest, and other deposit-rate ceilings limited banks’ ability to compete when market rates rose. As a result, deposit flows were largely determined by rates paid on nondeposit instruments.",{"name":120,"@type":111,"acceptedAnswer":121},"How can different deposit-rate adjustment speeds affect money demand?",{"text":122,"@type":114},"If deposit rates respond sluggishly, opportunity cost rises initially and demand for deposits falls temporarily. If rates adjust quickly but partially, opportunity cost changes with market rates but less than under a strict prohibition. If rates adjust instantly while maintaining a constant spread, opportunity cost and deposit demand are largely unaffected.","https://schema.org",{"og:url":83,"og:type":125,"og:title":65,"og:site_name":95,"og:description":67},"article",{"robots":127,"canonical":83},"index,follow",{"doc_id":129,"site_id":62},325528,1790128305,{"code":4,"msg":5,"data":132},{"doc_id":129,"user_id":133,"nickname":92,"user_avatar":134,"doc_module":4,"category_id":39,"category_name":40,"doc_title":65,"doc_description":67,"doc_content":135,"file_id":136,"file_url":137,"file_type":138,"file_size":139,"view_count":105,"is_deleted":4,"is_public":8,"is_downloadable":8,"audit_status":8,"page_count":24,"language":140,"language_code":63,"site_id":62,"html_lang":63,"table_of_contents":141,"faqs":142,"seo_title":143,"seo_description":67,"update_tm":144,"read_time":145,"preview_page_count":4},8796095461564,"https://ap-avatar.wpscdn.com/davatar_155a257f0dc6eb9ab79c44ca47cae57d","by John B.Carlson  \nN  \n1  othing complicates the life of aneconomist quite like institutional change.When institutions change,pattems of be-havior change,and long-standing eco-nomic relationships may break down.Itofien takes time for new behavioral pat-terns to stabilize and hence for new rela-tionships to emerge.This lag frustrates theeconomist,who often must rely on histor-ical relationships as a basis for analysis.  \nAkey historical relationship has beenthe one between money and economicactivity.Regulatory change in the finan-cial industry in the 1980s wasexpectedto affect this relationship.Many ana-lysts believed that deregulation wouldenable depository institutions to payhigher yields on deposits and therebyclaim a larger share of the householdportfolio.This would in turn affect therelationship between money measures—comprised largely of deposits—andthe level of economc activity  \nMore recently,other changes in the finan-cial industry have made it difficult to in-terpret the behavior of the money supply.Over the past year,money growth hasbeen unusually weak,raisingconcemsabout the implications for the economy.While part of the weakness in moneygrowth reflects a slowdown in economicactivity,some of it can probably be attrib-uted to financial factors.  \nThis Economic Commentary examinesthe behavior of bank deposit yields inthe period after deregulation and dis-cusses some implications fordeposit  \nDeregulation,Money,andthe Economy  \nvariability and for the interpretation ofmoney growth.Though the relation-ship between money and the economyappears to have the same general formas it did before deregulation,it has be-come less reliable for interpreting short-run movements of money.  \n## ■ Demand for Deposits\n\nand Opportunity Cost  \nAn important determinant of the level ofbalances held in any given deposit is theforgone interest,or opportunity cost,ofnot holding the balances in nondeposit(that is,higher-yielding)financial instru-ments.The opportunity cost of a givendeposit typically is measured by the dif-ference between the market interest rateon a relatively risk-free,short-term asset(such as the three-month Treasury bill)and the rate paid on that deposit (itsown rate).  \nFrom 1933 until the financial deregula-tion of the 1980s,virtually all consumerdeposit rates were subject to some kindof ceiling or other restriction.Most sig-nificantly,checking accounts were pro-hibited from paying interest.Althoughbanks found ways to alter the yields ondeposits by offering gifts and providingfree services for deposits,the restrictionswere quite effective during periods ofhigh and rising interest rates.At thesetimes,banks could not respond competi-tively,and deposit flows were largelydetermined by rates paid on nondepositinstruments.  \nMarch 1,1991  \nIn the early 1980s,Congress author-ized significant changes in U.S.bank-ing regulations,giving banks andthrifts increased competitive powersand eliminating interest-rate restric-tions on deposits.Has the relationshipbetween money measures and the levelof economic activity changed as aresult of this financial deregulation?  \nThe advent of deregulation raised ques-tions about how deposit flows might beaffected if banks were allowed to bemore competitive in attracting funds.Such flows depend on how rapidlybanks adjust their deposit rates inresponse to changing market rates.  \nFor example,consider the case wheredeposit rates respond sluggishly tochanges in market rates.A permanentincrease in market interest rates wouldinitially be associated with an increasein opportunity cost as market ratesmoved above deposit rates,followedby a decrease as deposit rates caughtup.The demand for deposits would ini-tially be reduced as the opportunitycost increased.If the deposit rates ulti-mately adjusted point-for-point,theopportunity cost of the deposits wouldbe unaffected in the long run,as wouldthe demand for deposits.  \nIf,on the other hand,deposit rates ad-just quickly but only partially to achange in inter","cbCaiePmt2fg3B7B","https://ap.wps.com/l/cbCaiePmt2fg3B7B","pdf",1270324,"English","# Demand for Deposits and Opportunity Cost\n## Deposit Rates That Adjust Somewhat Quickly","[{\"question\":\"How does opportunity cost determine the level of bank deposits?\",\"answer\":\"The level of balances held in deposits is driven by forgone interest on nondeposit instruments. Opportunity cost is measured by the gap between a market rate on a short-term risk-free asset and the rate paid on deposits.\"},{\"question\":\"Why did interest-rate ceilings affect deposit flows before deregulation?\",\"answer\":\"Checking accounts were restricted from paying interest, and other deposit-rate ceilings limited banks’ ability to compete when market rates rose. As a result, deposit flows were largely determined by rates paid on nondeposit instruments.\"},{\"question\":\"How can different deposit-rate adjustment speeds affect money demand?\",\"answer\":\"If deposit rates respond sluggishly, opportunity cost rises initially and demand for deposits falls temporarily. If rates adjust quickly but partially, opportunity cost changes with market rates but less than under a strict prohibition. If rates adjust instantly while maintaining a constant spread, opportunity cost and deposit demand are largely unaffected.\"}]","Deregulation, Money and the Economy - Demand for Deposits and Opportunity Cost | PDF",1789970762,13]