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Banking technology in a Markov switching economy

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  • Isakin, Maksim
  • Serletis, Apostolos

Abstract

We take the user cost approach to modeling the financial firm that maximizes capitalized variable profit to investigate whether the monetary transmission mechanism differs in low and high interest rate environments. We use the panel of U.S. commercial banks from 1992 to 2014 to construct the user costs of financial goods and propose a two-step procedure to estimate a regime-dependent variable profit function in the normalized quadratic semiflexible functional form. We derive demands for and supplies of financial and non-financial goods and provide evidence consistent with neoclassical microeconomic theory. We find several significant differences in the technology of the financial firm across low and high interest rate regimes.

Suggested Citation

  • Isakin, Maksim & Serletis, Apostolos, 2019. "Banking technology in a Markov switching economy," Journal of Macroeconomics, Elsevier, vol. 59(C), pages 154-168.
  • Handle: RePEc:eee:jmacro:v:59:y:2019:i:c:p:154-168
    DOI: 10.1016/j.jmacro.2018.11.007
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    Keywords

    Commercial banks; Flexible functional forms; Regime switching;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G2 - Financial Economics - - Financial Institutions and Services
    • D2 - Microeconomics - - Production and Organizations
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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