Banks As Coordinators of Economic Growth

IMF Working Papers, November 1, 2006

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Banks As Coordinators of Economic Growth

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Bibliographic details

• Authors: Kenichi Ueda
• Published: November 1, 2006
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451865240.001

Summary

• The paper formally identifies a role of banks: banks competitively internalize production externalities and facilitate economic growth.
• The author formulates a canonical growth model with externalities as a game among consumers, firms, and banks.
• Banks compete for deposits to seek monopoly profits, including profits from internalized externalities.
• Loan contracts specify price and quantity, and through these contracts banks control firms' investments.
• Each bank forms a firm group endogenously and internalizes externalities directly within its firm group and indirectly across firm groups.
• The model yields a unique equilibrium conditional on a requirement that separates competition for sources and uses of funds.
• The paper presents a realistic institution that satisfies this separation condition.

Model and Mechanism

• Canonical growth model with externalities modeled as a game among:
  • consumers,
  • firms,
  • banks.
• Banks’ strategic behavior:
  • compete for deposits,
  • seek monopoly profits that incorporate externalities,
  • use loan contracts that specify both price and quantity to control firm investment decisions.
• Firm grouping:
  • Each bank endogenously forms a firm group,
  • internalization of production externalities occurs directly within a firm group and indirectly across firm groups.

Equilibrium and Institutional Condition

• The equilibrium is unique under a condition that separates competition for sources and uses of funds.
• The paper presents a realistic institution that satisfies this condition (institutional details are developed in the paper).

Policy and Economic Implications

• Banks can play a coordinating role in economic growth by internalizing externalities through competitive behavior and contract design.
• Institutional arrangements that enable separation of competition for sources and uses of funds are central to ensuring the unique equilibrium and the growth-enhancing role of banks.

Subjects and Keywords (as listed)

• Subjects: Bank deposits, Banking, Competition, Deposit rates, Financial institutions, Financial markets, Financial services, Interbank markets, Loans
• Keywords: bank control, Bank deposits, bank h, Bank-oriented financial system, capital level, Competition, Deposit rates, deviating bank-firm pair, economic growth, equilibrium strategy, Europe, firm group, interbank market, Interbank markets, investment decision, loan market, loan rate, Loans, manufacturing activity, monopolist bank, monopoly bank, profit function, WP

Content in this bundle

• Banks as Coordinators of Economic Growth; Kenichi Ueda; IMF Working Paper 06/264; November 1, 2006
  • Banks as Coordinators of Economic Growth; Kenichi Ueda; IMF Working Paper 06/264; November 1, 2006 (Markdown version)
  • Banks as Coordinators of Economic Growth; Kenichi Ueda; IMF Working Paper 06/264; November 1, 2006 (PDF)