IDEAS home Printed from https://ideas.repec.org/p/hhs/rbnkwp/0331.html
   My bibliography  Save this paper

Money, Credit and Banking and the Cost of Financial Activity

Author

Listed:
  • Boel, Paola

    (Research Department, Central Bank of Sweden)

  • Camera, Gabriele

    (Chapman University and University of Basel)

Abstract

We extend the study of banking equilibrium in Berentsen, Camera and Waller (2007) by introducing an explicit production function for banks. 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 on deposits, which naturally reflects the efficiency of financial intermediation and underlying monetary policy. In this augmented model, equilibrium deposits yield zero return in a deflation or very low inflation. Hence, if monetary policy is sufficiently tight then banks end up reducing aggregate efficiency, soaking up labor resources while offering deposits that do not outperform idle balances.

Suggested Citation

  • Boel, Paola & Camera, Gabriele, 2016. "Money, Credit and Banking and the Cost of Financial Activity," Working Paper Series 331, Sveriges Riksbank (Central Bank of Sweden).
  • Handle: RePEc:hhs:rbnkwp:0331
    as

    Download full text from publisher

    File URL: http://www.riksbank.se/Documents/Rapporter/Working_papers/2016/rap_wp331_161031.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. António Antunes & Tiago Cavalcanti & Anne Villamil, 2013. "Costly Intermediation And Consumption Smoothing," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 459-472, January.
    2. Robert E. Lucas, 2001. "Inflation and Welfare," International Economic Association Series, in: Axel Leijonhufvud (ed.), Monetary Theory as a Basis for Monetary Policy, chapter 4, pages 96-142, Palgrave Macmillan.
    3. Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, vol. 135(1), pages 171-195, July.
    4. Valerie R. Bencivenga & Gabriele Camera, 2011. "Banking in a Matching Model of Money and Capital," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s2), pages 449-476, October.
    5. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    6. Goldfeld, Stephen M. & Sichel, Daniel E., 1990. "The demand for money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 8, pages 299-356, Elsevier.
    7. Barry Z. Cynamon & Donald H. Dutkowsky & Barry E. Jones, 2006. "Redefining the Monetary Agggregates: A Clean Sweep," Eastern Economic Journal, Eastern Economic Association, vol. 32(4), pages 661-672, Fall.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. S. Boragan Aruoba & Frank Schorfheide, 2011. "Sticky Prices versus Monetary Frictions: An Estimation of Policy Trade-Offs," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 60-90, January.
    2. Paola Boel, 2017. "The Redistributive Effects of Inflation and the Shape of Money Demand," LWS Working papers 25, LIS Cross-National Data Center in Luxembourg.
    3. Guillaume Rocheteau & Pierre‐Olivier Weill, 2011. "Liquidity in Frictional Asset Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s2), pages 261-282, October.
    4. Chu, Angus C. & Kan, Kamhon & Lai, Ching-Chong & Liao, Chih-Hsing, 2014. "Money, random matching and endogenous growth: A quantitative analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 173-187.
    5. Boel, Paola, 2018. "The redistributive effects of inflation and the shape of money demand," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 208-219.
    6. S. Boragan Aruoba & Christopher J. Waller & Randall Wright, 2009. "Money and capital: a quantitative analysis," Working Papers 2009-031, Federal Reserve Bank of St. Louis.
    7. Mohammed Ait Lahcen & Pedro Gomis‐Porqueras, 2021. "A Model of Endogenous Financial Inclusion: Implications for Inequality and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(5), pages 1175-1209, August.
    8. Silva, Mario, 2017. "New monetarism with endogenous product variety and monopolistic competition," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 158-181.
    9. Paola Boel & Gabriele Camera, 2020. "Monetary Equilibrium and the Cost of Banking Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(4), pages 653-683, June.
    10. Berentsen, Aleksander & Rojas Breu, Mariana & Shi, Shouyong, 2012. "Liquidity, innovation and growth," Journal of Monetary Economics, Elsevier, vol. 59(8), pages 721-737.
    11. Boel, Paola & Camera, Gabriele, 2009. "Financial sophistication and the distribution of the welfare cost of inflation," Journal of Monetary Economics, Elsevier, vol. 56(7), pages 968-978, October.
    12. Herrenbrueck, Lucas, 2014. "Quantitative Easing and the Liquidity Channel of Monetary Policy," MPRA Paper 70686, University Library of Munich, Germany, revised 10 Apr 2016.
    13. Matsuoka, Tarishi, 2022. "Asset prices and standing facilities in a monetary economy," Journal of Economic Dynamics and Control, Elsevier, vol. 135(C).
    14. Miquel Faig & Belén Jerez, 2007. "Precautionary Balances and the Velocity of Circulation of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 843-873, June.
    15. Wen, Yi, 2015. "Money, liquidity and welfare," European Economic Review, Elsevier, vol. 76(C), pages 1-24.
    16. Williamson, Stephen & Wright, Randall, 2010. "New Monetarist Economics: Models," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 2, pages 25-96, Elsevier.
    17. Boragan Aruoba & Morris Davis & Randall Wright, 2016. "Homework in Monetary Economics: Inflation, Home Production, and the Production of Homes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 105-124, July.
    18. Ennis, Huberto M., 2008. "Search, money, and inflation under private information," Journal of Economic Theory, Elsevier, vol. 138(1), pages 101-131, January.
    19. Dai, Wei & Serletis, Apostolos, 2019. "On the Markov switching welfare cost of inflation," Journal of Economic Dynamics and Control, Elsevier, vol. 108(C).
    20. Wang, Liang, 2016. "Endogenous search, price dispersion, and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 94-117.

    More about this item

    Keywords

    banks; frictions; matching;
    All these keywords.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hhs:rbnkwp:0331. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/rbgovse.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Lena Löfgren (email available below). General contact details of provider: https://edirc.repec.org/data/rbgovse.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.