Money, Credit and Banking and the Cost of Financial Activity

Riksbank Research Paper Series No. 155

Sveriges Riksbank Working Paper Series No. 331

32 Pages Posted: 7 Dec 2016

See all articles by Paola Boel

Paola Boel

Sveriges Riksbank - Research Division

Gabriele Camera

Chapman University - Economic Science Institute; University of Bologna - Dept. of Economics

Date Written: October 2016

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.

Keywords: banks, frictions, matching

JEL Classification: C70, D40, E30, J30

Suggested Citation

Boel, Paola and Camera, Gabriele, Money, Credit and Banking and the Cost of Financial Activity (October 2016). Sveriges Riksbank Working Paper Series No. 331. Available at SSRN: https://ssrn.com/abstract=2872020 or http://dx.doi.org/10.2139/ssrn.2872020

Paola Boel (Contact Author)

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

Gabriele Camera

Chapman University - Economic Science Institute ( email )

Orange, CA 92866
United States

HOME PAGE: http://www1.chapman.edu/~camera/

University of Bologna - Dept. of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy

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