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Technological progress, the "user cost of money," and the real output of banks

  • Basu, Susanto

    ()

    (Boston College)

  • Wang, J. Christina

    ()

    (Federal Reserve Bank of Boston)

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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Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 13-21.

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Length: 41 pages
Date of creation: 31 Dec 2013
Date of revision:
Handle: RePEc:fip:fedbwp:13-21
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  1. 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.
  2. Stanley Fischer, 1982. "A Framework for Monetary and Banking Analysis," NBER Working Papers 0936, National Bureau of Economic Research, Inc.
  3. 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.
  4. 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.
  5. Fischer, Stanley, 1983. "A Framework for Monetary and Banking Analysis," Economic Journal, Royal Economic Society, vol. 93(369a), pages 1-16, Supplemen.
  6. Hancock, Diana, 1985. "The Financial Firm: Production with Monetary and Nonmonetary Goods," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 859-80, October.
  7. Barnett, William A., 1978. "The user cost of money," Economics Letters, Elsevier, vol. 1(2), pages 145-149.
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