Banks as coordinators of economic growth and stability: Microfoundation for macroeconomy with externality

Kenichi Ueda

Journal of Economic Theory, 2013, vol. 148, issue 1, 322-352

Abstract: Competition among banks promotes growth and stability for an economy with production externality. Following Arrow and Debreu (1954) [6], I formulate a standard growth model with externality—a two-period version of Romer (1986) [39]—as a game among consumers, firms, and intermediaries. The Walrasian equilibrium, with an auctioneer, does not achieve the social optimum. Without an auctioneer or intermediaries, I show that no Nash equilibrium exists. With several banks strategically intermediating capital, a Nash equilibrium emerges with a realistic institution, i.e., an interbank market with a negotiation process in the loan market. The equilibrium outcome is uniquely determined and socially optimal.

Keywords: Bank competition; Bank control; Growth; Instability; Discontinuous game (search for similar items in EconPapers)
JEL-codes: C72 D51 G21 O16 O41 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:148:y:2013:i:1:p:322-352

DOI: 10.1016/j.jet.2012.09.003

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