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Economies of scale in banking, indeterminacy, and monetary policy

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  • Dressler, Scott

Abstract

This paper investigates economies of scale (ES) in financial intermediation as a source of equilibrium indeterminacy. Consumption in the model can be purchased with currency and deposits, and ES in intermediation implies that deposit costs are decreasing in aggregate deposits. The results suggest that indeterminacy does not depend on a large degree of ES nor a large intermediation sector, but on monetary policy and the determination of nominal interest rates. Monetary policies not targeting nominal rates allow for indeterminacy to arise for any degree of ES, while policies targeting nominal rates eliminates indeterminacy for all degrees of ES.

Suggested Citation

  • Dressler, Scott, 2008. "Economies of scale in banking, indeterminacy, and monetary policy," MPRA Paper 8370, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:8370
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    References listed on IDEAS

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    1. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June.
    2. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Real Indeterminacy in Monetary Models with Nominal Interest Rate Distortions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 767-789, October.
    3. Joseph P. Hughes & Loretta J. Mester, 1998. "Bank Capitalization And Cost: Evidence Of Scale Economies In Risk Management And Signaling," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 314-325, May.
    4. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
    5. Jason Allen & Ying Liu, 2007. "Efficiency and economies of scale of large Canadian banks," Canadian Journal of Economics, Canadian Economics Association, vol. 40(1), pages 225-244, February.
    6. Bryant, John, 1987. "The Paradox of Thrift, Liquidity Preference and Animal Spirits," Econometrica, Econometric Society, vol. 55(5), pages 1231-1235, September.
    7. Cooper, Russell & Corbae, Dean, 2002. "Financial Collapse: A Lesson from the Great Depression," Journal of Economic Theory, Elsevier, vol. 107(2), pages 159-190, December.
    8. Stephen D. Williamson, 1986. "Increasing Returns to Scale in Financial Intermediation and the Non-Neutrality of Government Policy," Review of Economic Studies, Oxford University Press, vol. 53(5), pages 863-875.
    9. J. Christina Wang, 2003. "Productivity and economies of scale in the production of bank service value added," Working Papers 03-7, Federal Reserve Bank of Boston.
    10. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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    Cited by:

    1. Juin-Jen Chang & Jang-Ting Guo & Jhy-Yuan Shieh & Wei-Neng Wang, 2015. "Sectoral Composition Of Government Spending And Macroeconomic (In)Stability," Economic Inquiry, Western Economic Association International, vol. 53(1), pages 23-33, January.
    2. Dressler, Scott J. & Kersting, Erasmus K., 2014. "Economies Of Scale In Banking, Confidence Shocks, And Business Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 18(05), pages 1069-1090, July.
    3. Dressler, Scott J., 2009. "Economies of scale in banking, confidence shocks, and business cycles," MPRA Paper 13310, University Library of Munich, Germany.

    More about this item

    Keywords

    Financial Intermediation; Economies of Scale; Equilibrium Indeterminacy; Monetary Policy;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium

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