We take up the hypothesis that risk premiums on equities are embodying the costs incurred by equity holders in monitoring the firms which they have invested in. This idea is a key ingredient in our construction of a two sector neoclassical model with widget producing firms and commercial banks. So-called user costs or interest rate spreads are key prices of commercial bank services in the model. Commercial banks produce deposit services (check-writing services or transactions services) and lending services to widget producers.
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number
979.