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A general-equilibrium asset-pricing approach to the measurement of nominal and real bank output

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  • Christina Wang
  • Susanto Basu
  • John G. Fernald

Abstract

This paper addresses the proper measurement of financial service output that is not priced explicitly. It shows how to impute nominal service output from financial intermediaries’ interest income and how to construct price indices for those financial services. We present an optimizing model with financial intermediaries that provide financial services to resolve asymmetric information between borrowers and lenders. We embed these intermediaries in a dynamic, stochastic, general-equilibrium model where assets are priced competitively according to their systematic risk, as in the standard consumption capital-asset-pricing model. In this environment, we show that it is critical to take risk into account in order to measure financial output accurately. We also show that even using a risk-adjusted reference rate does not solve all the problems associated with measuring nominal financial service output. Our model allows us to address important outstanding questions in output and productivity measurement for financial firms, such as: (1) What are the correct “reference rates” to use in calculating bank output? In particular, should they take account of risk? (2) If reference rates need to be risk-adjusted, does it mean that they must be ex ante rates of return? (3) What is the right price deflator for the output of financial firms? Is it just the general price index? (4) When—if ever—should we count capital gains of financial firms as part of financial service output?

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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 04-7.

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Date of creation: 2004
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Handle: RePEc:fip:fedbwp:04-7

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Keywords: Financial services industry ; Financial markets;

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References

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  1. Dennis J. Fixler & Kimberly D. Zieschang, 1992. "User Costs, Shadow Prices, and the Real Output of Banks," NBER Chapters, in: Output Measurement in the Service Sectors, pages 219-243 National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Charles, Steindel, 2010. "The Financial Crisis and the Measurement of Financial Sector Activity," MPRA Paper 27240, University Library of Munich, Germany.
  2. Aled ab Iorwerth, 2006. "How to Measure Government Productivity: A Review Article on 'Measurement of Government Output and Productivity for the National Accounts' (The Atkinson Report)," International Productivity Monitor, Centre for the Study of Living Standards, vol. 13, pages 57-74, Fall.
  3. Aoki, Shuhei, 2012. "A simple accounting framework for the effect of resource misallocation on aggregate productivity," Journal of the Japanese and International Economies, Elsevier, vol. 26(4), pages 473-494.
  4. Max Gillman & Mark N Harris & Michal Kejak, 2007. "The Interaction of Inflation and Financial Development with Endogenous Growth," Money Macro and Finance (MMF) Research Group Conference 2006 29, Money Macro and Finance Research Group.
  5. Burgess, Stephen, 2011. "Measuring financial sector output and its contribution to UK GDP," Bank of England Quarterly Bulletin, Bank of England, vol. 51(3), pages 234-246.
  6. Robert Inklaar & Marcel P. Timmer & Bart van Ark, 2008. "Data for Productivity Measurement in Market Services: An International Comparison," International Productivity Monitor, Centre for the Study of Living Standards, vol. 16, pages 72-81, Spring.
  7. Chaffai, Mohamed & Dietsch, Michel, 2013. "Modelling and measuring business risk and the resiliency of retail banks," Discussion Papers 35/2013, Deutsche Bundesbank, Research Centre.
  8. Garner, Thesia I. & Verbrugge, Randal, 2009. "Reconciling user costs and rental equivalence: Evidence from the US consumer expenditure survey," Journal of Housing Economics, Elsevier, vol. 18(3), pages 172-192, September.
  9. Thomas Philippon, 2012. "Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation," NBER Working Papers 18077, National Bureau of Economic Research, Inc.

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