Increasing Returns to Scale in Financial Intermediation and the Non-Neutrality of Government Policy

Stephen Williamson

The Review of Economic Studies, 1986, vol. 53, issue 5, 863-875

Abstract: A general equilibrium model of imperfectly competitive financial intermediaries is constructed and used to study the effects of some standard policy experiments. One-time increases in the growth rate and in the level of the stock of money have non-neutral (and sometimes surprising) effects on interest rates, the quantity of intermediated borrowing and lending, the number of intermediary firms, inflation and the price level. Optimal government macroeconomic policy is shown to reflect a tradeoff between public sector frictions and the capital market distortion created by increasing returns to scale and imperfect competition in private intermediation.

Date: 1986
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