Money, Credit and Banking and the Cost of Financial Activity
Sveriges Riksbank Working Paper Series No. 331
32 Pages Posted: 7 Dec 2016
Date Written: October 2016
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: Suggested Citation