A Theory of Production for the Financial Firm

Furthermore, 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.

Contenu

1 Introduction and Summary.- 1.1 The Need for a Theory of Production for Financial Firms.- 1.2 Issues in Technology and Regulation.- 1.3 User Cost Derivation.- 1.4 A Model of the Financial Firm.- 1.5 Data and Data Construction.- 1.6 Specification and Hypothesis Testing.- 1.7 Empirical Results.- 2 Issues in Technology and Regulation of Financial Firms.- 2.1 Introduction.- 2.2 Cost Function Approach.- 2.2.1 Output Separability.- 2.2.2 Non-Joint Technology.- 2.3 Profit Function Approach.- 2.4 Outputs, Inputs, and the "Classification Problem".- 2.5 Regulations and the Financial Firm.- 2.5.1 Reserve Requirements.- 2.5.2 Interest Rate Ceilings.- 2.5.2.1 Deposit Interest Rate Ceilings.- 2.5.2.2 Loan Interest Rate Ceilings - Usary Laws.- 2.5.3 Deposit Insurance Premium Rates.- 2.6 Concluding Remarks.- 3 User Cost Derivation for Financial Firms.- 3.1 User Costs for Assets and Liabilities.- 3.2 Implementation Problems.- 3.2.1 Expectations of Future Prices.- 3.2.2 The Discounting Rate.- 3.2.3 Depreciation Rates.- 4 A Model of the Financial Firm.- 4.1 Introduction.- 4.2 An Intertemporal Production Model of the Individual Financial Firm.- 5 Data and Data Construction.- 5.1 Introduction.- 5.2 Labor Services.- 5.3 Materials Services.- 5.4 Physical Capital Services.- 5.5 User Costs for Financial Services.- 5.5.1 Assets.- 5.5.1.1 Introduction.- 5.5.1.2 Investments.- 5.5.1.3 Real Estate Mortgages.- 5.5.1.4 Installment Loans.- 5.5.1.5 Credit Card Loans.- 5.5.1.6 Commercial, Agricultural and Other Loans.- 5.5.1.7 User Cost for Aggregate Loans.- 5.5.1.8 Cash.- 5.5.2 Liabilities.- 5.5.2.1 Demand Deposits.- 5.5.2.2 Time Deposits.- 5.5.2.3 Non-Deposit Liabilities.- 5.5.2.4 Time Deposits and Borrowed Money.- 5.5.3 Financial Capital.- 5.6 Variable Profits.- 5.7 Concluding Remarks.- Appendix Functional Cost Data on Capital.- 6 Specification and Hypothesis Testing.- 6.1 Introduction.- 6.2 Profit Function and Net Supplies.- 6.3 Regularity Restrictions.- 6.4 Tests of Bank Technology.- 6.4.1 Introduction.- 6.4.2 Existence of Monetary Subaggregates.- 6.4.2.1 Introduction.- 6.4.2.2 Money Supply Definition: Cash and Demand Deposits.- 6.4.2.3 Money Supply Definition: Cash, Demand and Time Deposits.- 6.5 Econometric Issues.- 6.5.1 Exogeneity of Prices and Quantities.- 6.5.2 Pooling Time Series and Cross Section Data.- 6.5.2.1 Bank Effects.- 6.5.2.2 Branching Regulation Effects.- 6.5.2.3 Deregulation Effects.- 6.6 Concluding Remarks.- Appendix Derivation of Hessian - Variable Profit Function.- 7 Empirical Results.- 7.1 Introduction.- 7.2 Elasticities of Transformation, Demand and Supply.- 7.3 Regularity Tests.- 7.4 Estimation of Transformation, Supply and Demand Elasticities.- 7.5 Rate of Return on Capital.- 7.6 Policy Implications: Monetary Policy and Bank Behavior.- 7.6.1 Introduction.- 7.6.2 Interest Rate Effects.- 7.6.3 Reserve Requirement Costs.- 7.6.4 Deposit Insurance - FDIC Regulation.- 7.7 Tests of Monetary Aggregation.- 7.8 Concluding Remarks.