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ECONOMIES OF SCALE IN BANKING, INDETERMINACY, AND MONETARY POLICY
Author(s) -
DRESSLER SCOTT J.
Publication year - 2011
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.2010.00307.x
Subject(s) - economics , indeterminacy (philosophy) , intermediation , monetary economics , monetary policy , currency , financial intermediary , consumption (sociology) , fiat money , general equilibrium theory , nominal interest rate , keynesian economics , macroeconomics , real interest rate , social science , physics , quantum mechanics , sociology
This paper investigates economies of scale (ES) in financial intermediation as a source of equilibrium indeterminacy. Financial intermediation is embedded into a standard flexible‐price monetary model, and provides deposits (inside money) that substitute with currency to purchase consumption. The results indicate that equilibrium indeterminacy does not depend on a large degree of ES in intermediation nor a large intermediation sector, but on monetary policy and the determination of nominal interest rates. Monetary policies not targeting nominal rates allow for indeterminacy to arise for any positive degree of ES, while policies targeting nominal rates eliminate indeterminacy for all degrees of ES . ( JEL C62, E44, E52)