The Macroeconomic Implications of Financial Deregulation

Christian Bordes and Jacques Melitz

No 309, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper explores the possible macroeconomic consequences of financial deregulation in an institutional environment where deregulation raises risks in banking. The central bank is assumed to maximize an objective function an argument of which is the probability of bank failure. It is then shown that the usual trade-offs between policy objectives imply that financial deregulation will affect optimal monetary policy: deregulation will lead to more interest rate smoothing than would otherwise be the case. Because of restricted entry into banking, deregulation will also call for some inflation. The framework for the discussion is a Poole model with a Lucas supply function and imperfect wage indexation.

Keywords: Bank Failure; Banking; Monetary Policy; Regulation (search for similar items in EconPapers)
Date: 1989-06
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Journal Article: The macroeconomic implications of financial deregulation (1991)
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