Banks as Coordinators of Economic Growth and Stability: Microfoundation for Macroeconomy with Externality

Kenichi Ueda
Publication Type: 
Papers
Publication Article File: 
Journal Name: 
Journal of Economic Theory
Journal Volume: 
Forthcoming
Publication Year: 
2012

 

Competition among banks promotes growth and stability for an economy with production externality. Following Arrow and Debreu (1954), I formulate a standard growth model with externality—a two-period version of Romer (1986)—as a game among consumers, firms, and intermediaries. The Walrasian equilibrium, with an auctioneer, does not achieve the social optimum. Without an auctioneer or intermediaries, I show that no Nash equilibrium exists. With several banks strategically intermediating capital, a Nash equilibrium emerges with a realistic institution, i.e., an interbank market with a negotiation process in the loan market. The equilibrium outcome is uniquely determined and socially optimal.

JEL Codes: 
C72, D51, G21, O16, O41
Region: 
Global
Topic: 
Financial Institutions
Topic: 
Economic Modeling
Topic: 
Growth