Economies of scale in banking, confidence shocks, and business cycles
AbstractThis paper quantitatively investigates equilibrium indeterminacy due to economies of scale (ES) in financial intermediation. Financial intermediation provides deposits (inside money) which can substitute with currency to purchase consumption, and depositing decisions are susceptible to non-fundamental confidence (sunspot) shocks. With the intermediation sector calibrated to match US data: (i) indeterminacy arises for small degrees of ES; (ii) sunspot shocks qualitatively resemble monetary shocks; and (iii) monetary policies can stabilize the real impact of sunspot shocks, but only under complete information. The analysis also assesses the removal of these shocks on the volatility decline observed during the US Great Moderation.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 13310.
Date of creation: Jan 2009
Date of revision:
Financial Intermediation; Inside Money; Indeterminacy; Business Cycles;
Other versions of this item:
- Scott J. Dressler & Erasmus K. Kersting, 2012. "Economies of Scale in Banking, Confidence Shocks, and Business Cycles," Villanova School of Business Department of Economics and Statistics Working Paper Series 18, Villanova School of Business Department of Economics and Statistics.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-02-14 (All new papers)
- NEP-BAN-2009-02-14 (Banking)
- NEP-BEC-2009-02-14 (Business Economics)
- NEP-CBA-2009-02-14 (Central Banking)
- NEP-DGE-2009-02-14 (Dynamic General Equilibrium)
- NEP-FDG-2009-02-14 (Financial Development & Growth)
- NEP-MAC-2009-02-14 (Macroeconomics)
- NEP-MON-2009-02-14 (Monetary Economics)
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