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Monetary Equilibrium and the Cost of Banking Activity
Author(s) -
BOEL PAOLA,
CAMERA GABRIELE
Publication year - 2020
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12676
Subject(s) - economics , interest rate , monetary policy , general equilibrium theory , monetary economics , inflation (cosmology) , financial intermediary , competitive equilibrium , yield (engineering) , welfare , intermediation , production (economics) , deflation , microeconomics , macroeconomics , market economy , physics , materials science , theoretical physics , metallurgy
We investigate the effects of banks' operating costs on allocations and welfare in a low interest rate environment. We introduce an explicit production function for banks in a microfounded model where banks employ labor resources, hired on a competitive market, to run their operations. In equilibrium, this generates a spread between interest rates on loans and deposits, which reflects the underlying monetary policy and the efficiency of financial intermediation. In a deflation or low‐inflation environment, equilibrium deposits yield zero returns. Hence, banks soak up labor resources to offer deposits that do not outperform idle balances, thus reducing aggregate efficiency.