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Economies of Scale in Banking, Confidence Shocks, and Business Cycles

Scott Dressler () and Erasmus Kersting ()

No 18, Villanova School of Business Department of Economics and Statistics Working Paper Series from Villanova School of Business Department of Economics and Statistics

Abstract: Equilibrium indeterminacy due to economies of scale (ES) in financial intermediation is quantitatively examined in a monetary business-cycle environment. Financial intermediation provides deposits which serve as a substitute for currency to purchase consumption, and depositing decisions are susceptible to non-fundamental shocks to confidence. The analysis considers various assumptions on nominal rigidities and the timing of deposit decisions. The results suggest that indeterminacy arises for small degrees of ES, and the resulting confidence shocks qualitatively mimic monetary shocks. A calibration exercise concludes that US economic volatility from this non-fundamental source has increased over time while volatility from fundamental sources has decreased.

Keywords: Firms; Financial Intermediation, Inside Money, Indeterminacy, Business Cycles (search for similar items in EconPapers)
JEL-codes: C68 E32 E44 (search for similar items in EconPapers)
Date: 2012-02
New Economics Papers: this item is included in nep-ban and nep-dge
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http://repec.library.villanova.edu/workingpapers/VSBEcon18.pdf (application/pdf)

Related works:
Journal Article: ECONOMIES OF SCALE IN BANKING, CONFIDENCE SHOCKS, AND BUSINESS CYCLES (2014) Downloads
Working Paper: Economies of scale in banking, confidence shocks, and business cycles (2009) Downloads
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