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ECONOMIES OF SCALE IN BANKING, CONFIDENCE SHOCKS, AND BUSINESS CYCLES

Published online by Cambridge University Press:  03 April 2013

Scott J. Dressler  and
Erasmus K. Kersting
Scott J. Dressler*
Affiliation:
Villanova University
Erasmus K. Kersting
Affiliation:
Villanova University
*
Address correspondence to: Scott J. Dressler, Department of Economics, Villanova University, 800 Lancaster Avenue, Villanova, PA 19085, USA; e-mail: scott.dressler@villanova.edu.
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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 that serve as a substitute for currency to purchase consumption, and depositing decisions are susceptible to nonfundamental 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 ES, and the resulting confidence shocks qualitatively mimic monetary shocks. A calibration exercise concludes that U.S. economic volatility from this nonfundamental source has increased over time while volatility from fundamental sources has decreased.

Keywords

Financial IntermediationInside MoneyIndeterminacyBusiness Cycles
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 5 , July 2014 , pp. 1069 - 1090
Copyright
Copyright © Cambridge University Press 2013 

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