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Banks as coordinators of economic growth and stability: Microfoundation for macroeconomy with externality

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  • Ueda, Kenichi

Abstract

Competition among banks promotes growth and stability for an economy with production externality. Following Arrow and Debreu (1954) [6], I formulate a standard growth model with externality—a two-period version of Romer (1986) [39]—as a game among consumers, firms, and intermediaries. The Walrasian equilibrium, with an auctioneer, does not achieve the social optimum. Without an auctioneer or intermediaries, I show that no Nash equilibrium exists. With several banks strategically intermediating capital, a Nash equilibrium emerges with a realistic institution, i.e., an interbank market with a negotiation process in the loan market. The equilibrium outcome is uniquely determined and socially optimal.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 148 (2013)
Issue (Month): 1 ()
Pages: 322-352

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Handle: RePEc:eee:jetheo:v:148:y:2013:i:1:p:322-352

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Web page: http://www.elsevier.com/locate/inca/622869

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Keywords: Bank competition; Bank control; Growth; Instability; Discontinuous game;

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Citations

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Cited by:
  1. Kenichi Ueda & Robert M. Townsend, 2007. "Welfare Gains from Financial Liberalization," IMF Working Papers 07/154, International Monetary Fund.
  2. Tom Gole & Tao Sun, 2013. "Financial Structures and Economic Outcomes: An Empirical Analysis," IMF Working Papers 13/121, International Monetary Fund.
  3. Kenichi Ueda & Stijn Claessens, 2008. "Banks and Labor as Stakeholders: Impact on Economic Performance," IMF Working Papers 08/229, International Monetary Fund.
  4. Abiad, Abdul & Oomes, Nienke & Ueda, Kenichi, 2008. "The quality effect: Does financial liberalization improve the allocation of capital?," Journal of Development Economics, Elsevier, vol. 87(2), pages 270-282, October.

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