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

Author

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  • Basu, Susanto

    () (Boston College)

  • Wang, J. Christina

    () (Federal Reserve Bank of Boston)

Abstract

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.

Suggested Citation

  • Basu, Susanto & Wang, J. Christina, 2013. "Technological progress, the "user cost of money," and the real output of banks," Working Papers 13-21, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbwp:13-21
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    References listed on IDEAS

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    1. 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.
    2. Susanto Basu & Robert Inklaar & J. Christina Wang, 2011. "The Value Of Risk: Measuring The Service Output Of U.S. Commercial Banks," Economic Inquiry, Western Economic Association International, vol. 49(1), pages 226-245, January.
    3. 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.
    4. J Christina Wang, 2010. "Risk and bank service output," IFC Bulletins chapters,in: Bank for International Settlements (ed.), The IFC's contribution to the 57th ISI Session, Durban, August 2009, volume 33, pages 317-333 Bank for International Settlements.
    5. 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.
    6. J. Christina Wang & Susanto Basu & John G. Fernald, 2009. "A General-Equilibrium Asset-Pricing Approach to the Measurement of Nominal and Real Bank Output," NBER Chapters,in: Price Index Concepts and Measurement, pages 273-320 National Bureau of Economic Research, Inc.
    7. 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.
    8. J. Christina Wang, 2003. "Service output of bank holding companies in the 1990s and the role of risk," Working Papers 03-6, Federal Reserve Bank of Boston.
    9. 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.
    10. Stanley Fischer, 1982. "A Framework for Monetary and Banking Analysis," NBER Working Papers 0936, National Bureau of Economic Research, Inc.
    11. Fischer, Stanley, 1983. "A Framework for Monetary and Banking Analysis," Economic Journal, Royal Economic Society, vol. 93(369a), pages 1-16, Supplemen.
    12. Barnett, William A., 1978. "The user cost of money," Economics Letters, Elsevier, vol. 1(2), pages 145-149.
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    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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