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- Title
ECONOMIES OF SCALE IN BANKING, CONFIDENCE SHOCKS, AND BUSINESS CYCLES.
- Authors
Dressler, Scott J.; Kersting, Erasmus K.
- Abstract
Equilibrium indeterminacy due to economies of scale (ES) in financial intermediation is quantitatively examined in a monetary business-cycle environment. Financial intermediation provides deposits that serve as a substitute for currency to purchase consumption, and depositing decisions are susceptible to nonfundamental shocks to confidence. The analysis considers various assumptions on nominal rigidities and the timing of deposit decisions. The results suggest that indeterminacy arises for small ES, and the resulting confidence shocks qualitatively mimic monetary shocks. A calibration exercise concludes that U.S. economic volatility from this nonfundamental source has increased over time while volatility from fundamental sources has decreased.
- Subjects
ECONOMIES of scale; BANKING industry; ECONOMIC shock; BUSINESS cycles; ECONOMIC equilibrium; MARKET volatility
- Publication
Macroeconomic Dynamics, 2014, Vol 18, Issue 5, p1069
- ISSN
1365-1005
- Publication type
Article
- DOI
10.1017/S1365100512000831