Banking technology in a Markov switching economy

Maksim Isakin and Apostolos Serletis

Journal of Macroeconomics, 2019, vol. 59, issue C, 154-168

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.

Keywords: Commercial banks; Flexible functional forms; Regime switching (search for similar items in EconPapers)
JEL-codes: C3 D2 E5 G2 (search for similar items in EconPapers)
Date: 2019
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Working Paper: Banking Technology in a Markov Switching Economy (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:59:y:2019:i:c:p:154-168

DOI: 10.1016/j.jmacro.2018.11.007

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