Technological progress, the "user cost of money," and the real output of banks
Financial institutions provide their customers a variety of unpriced services and cover their costs through interest margins - the interest rates they receive on assets are generally higher than the rates they pay on liabilities. In particular, banks pay below-public-market interest rates on deposits while charging above-public-market rates on loans. Various authors have suggested that this situation allows one to measure the real quantity of financial services provided without explicit prices as proportional to the real stocks of financial assets held by households. We present a general-equilibrium Baumol-Tobin model where households need bank services to purchase consumption goods. Bank deposits are the single medium of exchange in the economy. The model shows that financial services are proportional to the stocks of assets only under restrictive conditions, including the assumption that either all technologies are constant or banks' technology grows at the same rate as technology in the nonfinancial economy while relative technologies of other financial institutions possibly decline. In contrast, measuring real financial output by directly counting the flow of actual services is a robust method unaffected by unbalanced technological change.
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- Rotemberg, Julio J, 1984.
"A Monetary Equilibrium Model with Transactions Costs,"
Journal of Political Economy,
University of Chicago Press, vol. 92(1), pages 40-58, February.
- Julio J. Rotemberg, 1982. "A Monetary Equilibrium Model with Transactions Costs," NBER Working Papers 0978, National Bureau of Economic Research, Inc.
- Rogers, Kevin E., 1998. "Nontraditional activities and the efficiency of US commercial banks," Journal of Banking & Finance, Elsevier, vol. 22(4), pages 467-482, May.
- William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 66(4), pages 545-556.
- Barnett, William A., 1978. "The user cost of money," Economics Letters, Elsevier, vol. 1(2), pages 145-149.
- Dennis J. Fixler & Kimberly D. Zieschang, 1992. "User Costs, Shadow Prices, and the Real Output of Banks," NBER Chapters, in: Output Measurement in the Service Sectors, pages 219-243 National Bureau of Economic Research, Inc.
- Stanley Fischer, 1982. "A Framework for Monetary and Banking Analysis," NBER Working Papers 0936, National Bureau of Economic Research, Inc.
- Hancock, Diana, 1985. "The Financial Firm: Production with Monetary and Nonmonetary Goods," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 859-880, October.
- Fischer, Stanley, 1983. "A Framework for Monetary and Banking Analysis," Economic Journal, Royal Economic Society, vol. 93(369a), pages 1-16, Supplemen.
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