Banking Technology in a Markov Switching Economy

36 Pages Posted: 14 Dec 2018

See all articles by Maksim Isakin

Maksim Isakin

University of Calgary

Apostolos Serletis

University of Calgary - Department of Economics

Date Written: November 15, 2018

Abstract

We take the user cost approach to modeling the financial firm that maximizes capitalized variable profit to investigate whether the monetary transmission mechanism differs in low and high interest rate environments. We use the panel of U.S. commercial banks from 1992 to 2014 to construct the user costs of financial goods and propose a two-step procedure to estimate a regime-dependent variable profit function in the normalized quadratic semiflexible functional form. We derive demands for and supplies of financial and non-financial goods and provide evidence consistent with neoclassical microeconomic theory. We find several significant differences in the technology of the financial firm across low and high interest rate regimes.

Suggested Citation

Isakin, Maksim and Serletis, Apostolos, Banking Technology in a Markov Switching Economy (November 15, 2018). Journal of Macroeconomics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3289256

Maksim Isakin

University of Calgary ( email )

University Drive
Calgary, Alberta T2N 1N4
Canada

Apostolos Serletis (Contact Author)

University of Calgary - Department of Economics ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada
403 220-4091 (Phone)
403 282-5262 (Fax)

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