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Banks as coordinators of economic growth and stability: Microfoundation for macroeconomy with externality

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  • Ueda, Kenichi

Abstract

Competition among banks promotes growth and stability for an economy with production externality. Following Arrow and Debreu (1954) [6], I formulate a standard growth model with externality—a two-period version of Romer (1986) [39]—as a game among consumers, firms, and intermediaries. The Walrasian equilibrium, with an auctioneer, does not achieve the social optimum. Without an auctioneer or intermediaries, I show that no Nash equilibrium exists. With several banks strategically intermediating capital, a Nash equilibrium emerges with a realistic institution, i.e., an interbank market with a negotiation process in the loan market. The equilibrium outcome is uniquely determined and socially optimal.

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  • Ueda, Kenichi, 2013. "Banks as coordinators of economic growth and stability: Microfoundation for macroeconomy with externality," Journal of Economic Theory, Elsevier, vol. 148(1), pages 322-352.
    • Handle: RePEc:eee:jetheo:v:148:y:2013:i:1:p:322-352
    DOI: 10.1016/j.jet.2012.09.003
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    Cited by:

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    2. UEDA Kenichi, 2019. "Speedy Bankruptcy Procedures and Bank Bailouts," Discussion papers 19108, Research Institute of Economy, Trade and Industry (RIETI).
    3. Claessens, Stijn & Ueda, Kenichi, 2020. "Basic Employment Protection, Bargaining Power, and Economic Outcomes," Journal of Law, Finance, and Accounting, now publishers, vol. 5(2), pages 179-229, September.
    4. Takatoshi Ito & Kazumasa Iwata & Colin McKenzie & Shujiro Urata, 2018. "Changing Global Financial and Trading Systems and Asia: Editors’ Overview," Asian Economic Policy Review, Japan Center for Economic Research, vol. 13(2), pages 177-191, July.
    5. Cao, Jin & Chollete, Lorán, 2017. "Monetary policy and financial stability in the long run: A simple game-theoretic approach," Journal of Financial Stability, Elsevier, vol. 28(C), pages 125-142.
    6. Kenichi Ueda, 2018. "Comment on “Is China’s Development Finance a Challenge to the International Order?”," Asian Economic Policy Review, Japan Center for Economic Research, vol. 13(2), pages 299-300, July.
    7. Saida Daly & Mohamed Frikha, 2016. "Banks and economic growth in developing countries: What about Islamic banks?," Cogent Economics & Finance, Taylor & Francis Journals, vol. 4(1), pages 1168728-116, December.

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    More about this item

    Keywords

    Bank competition; Bank control; Growth; Instability; Discontinuous game;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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