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Transactions Costs, Inflation, and the Variety of Intermediation Services

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  • Williamson, Stephen D

Abstract

A general-equilibrium model with fixed costs of financial intermediation and costs of transacting with intermediaries is constructed. This model is used to show that ignoring fixed costs of in termediation is not innocuous in Tobin-Baumol-type transactions cost models of money demand. Deflation is optimal in spite of the fact that an increase in inflation reduces nominal interest rates and may increase the transactions costs incurred by all groups of economic agents. Changes in reserve requirements have ambiguous effects. The authors obtain novel results due to the fact that the variety of intermediation services is affected by government intervention. Copyright 1987 by Ohio State University Press.

Suggested Citation

  • Williamson, Stephen D, 1987. "Transactions Costs, Inflation, and the Variety of Intermediation Services," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(4), pages 484-498, November.
  • Handle: RePEc:mcb:jmoncb:v:19:y:1987:i:4:p:484-98
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    References listed on IDEAS

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    1. Cyert, Richard M & DeGroot, Morris H, 1974. "Rational Expectations and Bayesian Analysis," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 521-536, May/June.
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    3. Michael Dotsey, 1985. "Monetary policy, secrecy, and federal funds rate behavior," Working Paper 85-04, Federal Reserve Bank of Richmond.
    4. V. Vance Roley & Carl E. Walsh, 1985. "Monetary Policy Regimes, Expected Inflation, and the Response of Interest Rates to Money Announcements," The Quarterly Journal of Economics, Oxford University Press, vol. 100(Supplemen), pages 1011-1039.
    5. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
    6. Nichols, Donald A & Small, David H & Webster, Charles E, Jr, 1983. "Why Interest Rates Rise When an Unexpectedly Large Money Stock Is Announced," American Economic Review, American Economic Association, vol. 73(3), pages 383-388, June.
    7. Marvin Goodfriend & Gary S. Anderson & Anil K. Kashyap & George R. Moore & Richard D. Porter, 1984. "A weekly perfect foresight model of the nonborrowed reserve operating procedure," Working Paper 84-04, Federal Reserve Bank of Richmond.
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    10. Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1190-1219, December.
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    Cited by:

    1. Amable, Bruno & Chatelain, Jean-Bernard & De Bandt, Olivier, 2002. "Optimal capacity in the banking sector and economic growth," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 491-517, March.
    2. Bruno Amable & Jean-Bernard Chatelain, 1999. "Infrastructures financières et croissance économique," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00432131, HAL.
    3. Hyytinen, Ari, 2001. "Information Production, Banking Competition and the Market Structure of the Banking Industry," Discussion Papers 749, The Research Institute of the Finnish Economy.
    4. Ari Hyytinen & Tuomas Takalo, 2002. "Enhancing Bank Transparency: A Re-assessment," Review of Finance, European Finance Association, vol. 6(3), pages 429-445.
    5. Hyytinen, Ari & Pajarinen, Mika, 2001. "Financial Systems and Venture Capital in Nordic Countries: A comparative Study," Discussion Papers 774, The Research Institute of the Finnish Economy.
    6. Sherrill Shaffer, 2008. "Earnings Valuation And Sources Of Growth," CAMA Working Papers 2008-32, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    7. Hyytinen, Ari, 2003. "Information production and lending market competition," Journal of Economics and Business, Elsevier, vol. 55(3), pages 233-253.

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