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Monetary Equilibrium and the Cost of Banking Activity

Author

Listed:
  • Paola Boel

    (Sveriges Riksbank)

  • Gabriele Camera

    () (Economic Science Institute, Chapman University & University of Bologna)

Abstract

We investigate the effects of banks’ operating costs on allocations and welfare in a low interest rate environment. We introduce an explicit production function for banks in a microfounded model where banks employ labor resources, hired on a competitive market, to run their operations. In equilibrium, this generates a spread between interest rates on loans and deposits, which naturally reflects the underlying monetary policy and the efficiency of financial intermediation. In a deflation or low inflation environment, equilibrium deposits yield zero returns. Hence, banks end up soaking up labor resources to offer deposits that do not outperform idle balances, thus reducing aggregate efficiency.

Suggested Citation

  • Paola Boel & Gabriele Camera, 2019. "Monetary Equilibrium and the Cost of Banking Activity," Working Papers 19-12, Chapman University, Economic Science Institute.
  • Handle: RePEc:chu:wpaper:19-12
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    File URL: https://digitalcommons.chapman.edu/esi_working_papers/270/
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    More about this item

    Keywords

    banks; frictions; matching;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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