Economies of Scale in Banking, Confidence Shocks, and Business Cycles
AbstractEquilibrium indeterminacy due to economies of scale (ES) in financial intermediation is quantitatively examined in a monetary business-cycle environment. Financial intermediation provides deposits which serve as a substitute for currency to purchase consumption, and depositing decisions are susceptible to non-fundamental shocks to confidence. The analysis considers various assumptions on nominal rigidities and the timing of deposit decisions. The results suggest that indeterminacy arises for small degrees of ES, and the resulting confidence shocks qualitatively mimic monetary shocks. A calibration exercise concludes that US economic volatility from this non-fundamental source has increased over time while volatility from fundamental sources has decreased.
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Bibliographic InfoPaper provided by Villanova School of Business Department of Economics and Statistics in its series Villanova School of Business Department of Economics and Statistics Working Paper Series with number 18.
Date of creation: Feb 2012
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Web page: http://www.villanova.edu/business/facultyareas/economics/
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Firms; Financial Intermediation; Inside Money; Indeterminacy; Business Cycles;
Other versions of this item:
- Dressler, Scott J., 2009. "Economies of scale in banking, confidence shocks, and business cycles," MPRA Paper 13310, University Library of Munich, Germany.
- C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- 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-2012-03-28 (All new papers)
- NEP-BAN-2012-03-28 (Banking)
- NEP-DGE-2012-03-28 (Dynamic General Equilibrium)
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