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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. Joseph P. Hughes, 1997. "Bank Capitalization and Cost: Evidence of Scale Economies in Risk Management and Signaling," Departmental Working Papers, Rutgers University, Department of Economics 199601, Rutgers University, Department of Economics.
  2. Benhabib, J. & Farmer, R.E.A, 1991. "Indeterminacy and Increasing Returns," Papers, Cambridge - Risk, Information & Quantity Signals 165, Cambridge - Risk, Information & Quantity Signals.
  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, Wiley Blackwell, vol. 53(5), pages 863-75, October.
  4. 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.
  5. Jason Allen & Ying Liu, 2005. "Efficiency and Economies of Scale of Large Canadian Banks," Working Papers, Bank of Canada 05-13, Bank of Canada.
  6. 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.
  7. Cooper, Russell & Corbae, Dean, 2002. "Financial Collapse: A Lesson from the Great Depression," Journal of Economic Theory, Elsevier, Elsevier, vol. 107(2), pages 159-190, December.
  8. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
  9. Bryant, John, 1987. "The Paradox of Thrift, Liquidity Preference and Animal Spirits," Econometrica, Econometric Society, Econometric Society, vol. 55(5), pages 1231-35, September.
  10. J. Christina Wang, 2003. "Productivity and economies of scale in the production of bank service value added," Working Papers, Federal Reserve Bank of Boston 03-7, Federal Reserve Bank of Boston.
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Cited by:
  1. Jang-Ting Guo & Juin-Jen Chang & Jhy-Yuan Shieh & Wei-Neng Wang, 2013. "Sectoral Composition of Government Spending and Macroeconomic (In)stability," Working Papers 201305, University of California at Riverside, Department of Economics, revised Sep 2013.
  2. Dressler, Scott J., 2009. "Economies of scale in banking, confidence shocks, and business cycles," MPRA Paper 13310, University Library of Munich, Germany.

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