Banks as Coordinators of Economic Growth and Stability: Microfoundation for Macroeconomy with Externality
International Monetary Fund (IMF)
May 2, 2012
Journal of Economic Theory, Forthcoming
Competition among banks promotes growth and stability for an economy with production externality. Following Arrow and Debreu (1954), I formulate a standard growth model with externality — a two-period version of Romer (1986) — as a game among consumers, firms, and intermediaries. The Walrasian equilibrium, with an auctioneer, does not achieve the social optimum. Without an auctioneer or intermediaries, I show that no Nash equilibrium exists. With several banks strategically intermediating capital, a Nash equilibrium emerges with a realistic institution, i.e., an interbank market with a negotiation process in the loan market.The equilibrium outcome is uniquely determined and socially optimal.
Number of Pages in PDF File: 64
Keywords: bank competition, bank control, growth, instability, discontinuous game
JEL Classification: C72, D51, G21, O16, O41
Date posted: January 27, 2010 ; Last revised: May 12, 2012
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