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Banks As Coordinators of Economic Growth

Kenichi Ueda

No 2006/264, IMF Working Papers from International Monetary Fund

Abstract: This paper formally identifies an important role of banks: Banks competitively internalize production externalities and facilitate economic growth. I formulate a canonical growth model with externalities as a game among consumers, firms, and banks. Banks compete for deposits to seek monopoly profits, including externalities. Using loan contracts that specify price and quantity, banks control firms' investments. Each bank forms a firm group endogenously and internalizes externalities directly within a firm group and indirectly across firm groups. This unique equilibrium requires a condition that separates competition for sources and uses of funds. I present a realistic institution that satisfies this condition.

Keywords: WP; interbank market; Bank-oriented financial system; bank control; firm group; economic growth; equilibrium strategy; bank h; loan market; manufacturing activity; profit function; deviating bank-firm pair; investment decision; capital level; monopolist bank; loan rate; monopoly bank; Loans; Interbank markets; Deposit rates; Bank deposits; Competition; Europe (search for similar items in EconPapers)
Pages: 75
Date: 2006-11-01
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Handle: RePEc:imf:imfwpa:2006/264