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Banks as Coordinators of Economic Growth and Stability: Microfoundation for Macroeconomy with Externality

64 Pages Posted: 27 Jan 2010 Last revised: 12 May 2012

Kenichi Ueda

University of Tokyo - Faculty of Economics

Date Written: May 2, 2012

Abstract

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.

Keywords: bank competition, bank control, growth, instability, discontinuous game

JEL Classification: C72, D51, G21, O16, O41

Suggested Citation

Ueda, Kenichi, Banks as Coordinators of Economic Growth and Stability: Microfoundation for Macroeconomy with Externality (May 2, 2012). Journal of Economic Theory, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1542930 or http://dx.doi.org/10.2139/ssrn.1542930

Kenichi Ueda (Contact Author)

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan

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