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Economies of scale in banking, indeterminacy, and monetary policy

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  • Dressler, Scott

Abstract

This paper investigates economies of scale (ES) in financial intermediation as a source of equilibrium indeterminacy. Consumption in the model can be purchased with currency and deposits, and ES in intermediation implies that deposit costs are decreasing in aggregate deposits. The results suggest that indeterminacy does not depend on a large degree of ES nor a large intermediation sector, but on monetary policy and the determination of nominal interest rates. Monetary policies not targeting nominal rates allow for indeterminacy to arise for any degree of ES, while policies targeting nominal rates eliminates indeterminacy for all degrees of ES.

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File URL: http://mpra.ub.uni-muenchen.de/8370/
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File URL: http://mpra.ub.uni-muenchen.de/11882/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8370.

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Date of creation: Mar 2008
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Handle: RePEc:pra:mprapa:8370

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Keywords: Financial Intermediation; Economies of Scale; Equilibrium Indeterminacy; Monetary Policy;

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References

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  1. Benhabib, J. & Farmer, R.E.A, 1991. "Indeterminacy and Increasing Returns," Papers 165, Cambridge - Risk, Information & Quantity Signals.
  2. Bryant, John, 1987. "The Paradox of Thrift, Liquidity Preference and Animal Spirits," Econometrica, Econometric Society, vol. 55(5), pages 1231-35, September.
  3. Williamson, Stephen D, 1986. "Increasing Returns to Scale in Financial Intermediation and the Non-neuturality of Government Policy," Review of Economic Studies, Wiley Blackwell, vol. 53(5), pages 863-75, October.
  4. Jason Allen & Ying Liu, 2007. "Efficiency and economies of scale of large Canadian banks," Canadian Journal of Economics, Canadian Economics Association, vol. 40(1), pages 225-244, February.
  5. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
  6. Cooper, Russell & Corbae, Dean, 2002. "Financial Collapse: A Lesson from the Great Depression," Journal of Economic Theory, Elsevier, vol. 107(2), pages 159-190, December.
  7. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  8. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Real Indeterminacy in Monetary Models with Nominal Interest Rate Distortions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 767-789, October.
  9. Joseph P. Hughes & Loretta J. Mester, 1997. "Bank capitalization and cost: evidence of scale economies in risk management and signaling," Working Papers 96-2, Federal Reserve Bank of Philadelphia.
  10. J. Christina Wang, 2003. "Productivity and economies of scale in the production of bank service value added," Working Papers 03-7, Federal Reserve Bank of Boston.
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Cited by:
  1. Dressler, Scott J., 2009. "Economies of scale in banking, confidence shocks, and business cycles," MPRA Paper 13310, University Library of Munich, Germany.
  2. Juin-Jen Chang & Jang-Ting Guo & Jhy-Yuan Shieh & Wei-Neng Wang, 2013. "Sectoral Composition of Government Spending and Macroeconomic (In)stability," IEAS Working Paper : academic research 13-A010, Institute of Economics, Academia Sinica, Taipei, Taiwan.

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