Banks as Coordinators of Economic Growth

77 Pages Posted: 12 Jan 2007

See all articles by Kenichi Ueda

Kenichi Ueda

University of Tokyo - Faculty of Economics

Date Written: November 2006

Abstract

This paper formally identifies an important role of banks: Banks competitively internalize production externalities and facilitate economic growth. I formulate a canonical growth model with externalities as a game among consumers, firms, and banks. Banks compete for deposits to seek monopoly profits, including externalities. Using loan contracts that specify price and quantity, banks control firms' investments. Each bank forms a firm group endogenously and internalizes externalities directly within a firm group and indirectly across firm groups. This unique equilibrium requires a condition that separates competition for sources and uses of funds. I present a realistic institution that satisfies this condition.

Keywords: Banks, Financial systems, Economic growth, Economic models

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

Suggested Citation

Ueda, Kenichi, Banks as Coordinators of Economic Growth (November 2006). IMF Working Paper No. 06/264. Available at SSRN: https://ssrn.com/abstract=956727

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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