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Economies Of Scale In Banking, Indeterminacy, And Monetary Policy

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  • SCOTT J. DRESSLER

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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Suggested Citation

  • Scott J. Dressler, 2011. "Economies Of Scale In Banking, Indeterminacy, And Monetary Policy," Economic Inquiry, Western Economic Association International, vol. 49(1), pages 185-193, January.
  • Handle: RePEc:bla:ecinqu:v:49:y:2011:i:1:p:185-193
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    1. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June.
    2. 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.
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    8. 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.
    9. 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.
    10. 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.
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    Cited by:

    1. Juin‐Jen Chang & Jang‐Ting Guo & Jhy‐Yuan Shieh & Wei‐Neng Wang, 2015. "Sectoral Composition Of Government Spending And Macroeconomic (In)Stability," Economic Inquiry, Western Economic Association International, vol. 53(1), pages 23-33, January.
    2. Dressler, Scott J., 2009. "Economies of scale in banking, confidence shocks, and business cycles," MPRA Paper 13310, University Library of Munich, Germany.
    3. Dressler, Scott J. & Kersting, Erasmus K., 2014. "Economies Of Scale In Banking, Confidence Shocks, And Business Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 18(5), pages 1069-1090, July.
    4. Dressler, Scott J. & Kersting, Erasmus K., 2015. "Excess reserves and economic activity," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 17-31.

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium

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