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Economies of Scale in Banking, Confidence Shocks, and Business Cycles

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Equilibrium 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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File URL: http://repec.library.villanova.edu/workingpapers/VSBEcon18.pdf
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Paper 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.

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Date of creation: Feb 2012
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Handle: RePEc:vil:papers:18

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Web page: http://www.villanova.edu/business/facultyareas/economics/
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Keywords: Firms; Financial Intermediation; Inside Money; Indeterminacy; Business Cycles;

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