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Banking in General Equilibrium

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  • Ben S. Bernanke
  • Mark L. Gertler

Abstract

This paper attempts to provide a step towards understanding the role of financial intermediaries ("banks") in aggregate economic activity. We first develop a model of the intermediary sector which is highly simplified, but rich enough to motivate several special features of bauks. Of particular importance in our model is the assumption that banks are more efficient than the public in evaluating and auditing certain information --intensive loan projects. Banks are also assumed to have private information about their investments, which motivates the heavy reliance of banks on debt rather than equity finance and their need for buffer stock capital. We embed this intermediary sector in a general equilibrium framework, which includes consumers and a non-banking investment sector. Mainly because banks have superior access to some investments, factors affecting the size or efficiency of banking will also have an impact on the aggregate economy. Among the factors affecting intermediation, we show, are the adequacy of bank capital, the riskiness of bank investments, and the costs of bank monitoring. We also show that our model is potentially useful for understanding the macroeconomic effects of phenomena such as financial crises, disintermediation, banking regulation, and certain types of monetary policy.

Suggested Citation

  • Ben S. Bernanke & Mark L. Gertler, 1985. "Banking in General Equilibrium," NBER Working Papers 1647, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1647
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    References listed on IDEAS

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    1. Blinder, Alan S & Stiglitz, Joseph E, 1983. "Money, Credit Constraints, and Economic Activity," American Economic Review, American Economic Association, vol. 73(2), pages 297-302, May.
    2. Smith, Bruce D., 1984. "Private information, deposit interest rates, and the `stability' of the banking system," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 293-317, November.
    3. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    4. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    5. Donald D. Hester, 1981. "Innovations and Monetary Control," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 141-200.
    6. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
    7. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    8. Peltzman, Sam, 1970. "Capital Investment in Commercial Banking and Its Relationship to Portfolio Regulation," Journal of Political Economy, University of Chicago Press, vol. 78(1), pages 1-26, Jan.-Feb..
    9. Townsend, Robert M, 1983. "Financial Structure and Economic Activity," American Economic Review, American Economic Association, vol. 73(5), pages 895-911, December.
    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. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
    13. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
    14. King, Robert G & Plosser, Charles I, 1984. "Money, Credit, and Prices in a Real Business Cycle," American Economic Review, American Economic Association, vol. 74(3), pages 363-380, June.
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    Cited by:

    1. Steven Ongena, 1999. "Lending Relationships, Bank Default and Economic Activity," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 6(2), pages 257-280.
    2. Steven Ongena, 1995. "Monetary policy and credit conditions: new evidence," Macroeconomics 9503001, EconWPA.
    3. Kevin Moran & Cesaire Meh, 2004. "Bank Capital, Agency Costs, and Monetary Policy," 2004 Meeting Papers 318, Society for Economic Dynamics.
    4. Hans Degryse & Steven Ongena, 2002. "Bank-Firm Relationships and International Banking Markets," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 9(3), pages 401-417.
    5. de la Fuente, Angel & Marin, JoseMaria, 1996. "Innovation, bank monitoring, and endogenous financial development," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 269-301, October.
    6. Calomiris, Charles W & Hubbard, R Glenn, 1990. "Firm Heterogeneity, Internal Finance, and 'Credit Rationing.'," Economic Journal, Royal Economic Society, vol. 100(399), pages 90-104, March.
    7. Mervyn K. Lewis, 1992. "Modern Banking in Theory and Practice," Revue Économique, Programme National Persée, vol. 43(2), pages 203-228.
    8. Francisco Rosende & Rodrigo Vergara, 1986. "Opciones de Política para el Sector Financiero," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 23(70), pages 373-398.
    9. Martin Eichenbaum & Kenneth I. Singleton, 1986. "Do Equilibrium Real Business Cycle Theories Explain Postwar U.S. Business Cycles?," NBER Chapters,in: NBER Macroeconomics Annual 1986, Volume 1, pages 91-146 National Bureau of Economic Research, Inc.
    10. Francisco Rosende & Luis Oscar Herrera, 1991. "Teoría y Política Monetaria: Elementos para el Análisis," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 28(83), pages 55-94.

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