A Theory of Production for the Financial FirmFurthermore, if the effects of regulations on user costs are excluded, it is impossible to analyze monetary policy effects. Chapter 2 examines the principal areas of regulation that affect user costs. For example, reserve requirements, as administered by the Federal Reserve, act as a tax on financial firms so covered. Required reserves earn no return to the financial firm and there is foregone revenue. Deposit insurance increases the user cost of servicing deposits to the banks. Interest rate regulations place limits on interest rates on time de posits, or prohibit payments on demand deposits during part of the period studied. Underlying all these are the open market operations of the Federal Reserve, and their effects on interest rates and the quantities of financial goods. Chapter 2 reveals that previous work on the estimation of bank tech nologies is incomplete, and that the regulations require modelling as a part of the profit maximizing structure. 1.3 User Cost Derivation Chapter 3 discusses the construction of user costs. These are derived for the services from all assets or liabilities on a bank balance sheet or appearing on the income statement. The user cost formulation permits goods to be classified as outputs and inputs. Those with a positive user cost, where expenditures per unit exceed revenues per unit, are inputs. The unit for financial goods such as loans or deposits is one dollar per period. Goods with a negative user cost, with expenditures falling below revenue per unit, are outputs. |
Contents
ISSUES IN TECHNOLOGY AND REGULATION OF FINANCIAL FIRMS | 1 |
USER COST DERIVATION FOR FINANCIAL FIRMS | 19 |
A MODEL OF THE FINANCIAL FIRM | 27 |
DATA AND DATA CONSTRUCTION | 43 |
SPECIFICATION AND HYPOTHESIS TESTING | 79 |
EMPIRICAL RESULTS | 101 |
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balance sheet bank premises bank structure Barnett Benston capital gains cash and demand Cobb-Douglas comparative static constructed convexity cost function credit card loans demand deposits deposit insurance depository institutions depreciation deregulation effects derived Diewert discounting rate Divisia Divisia index dollar econometric Economic elasticities of supply equations estimation expenditures FCA data FDIC Federal Reserve System financial firm financial institution financial services functional form geometric mean Hanweck Hessian matrix Humphrey income increase input demands Installment loans interest rate interest rate ceilings labor linear homogeneity loans and demand materials Monetary Aggregates monetary policy monetary subaggregate money supply monotonicity N₁ N₂ negative non-negative nondemand deposit funds outputs and inputs parameters percent period portfolio production quantity real user cost regulations required reserve reserve requirements restrictions revenue sample service charge rate Statistics symmetry Table theory tion Törnqvist transactions accounts transactions deposits translog unit variable profit function მყ