On the Welfare Effects of Credit Arrangements

Chiu, Jonathan; Mu, Dong; Shao, Enchuan

doi:10.1111/iere.12315

Cited by 13 publications

(18 citation statements)

References 30 publications

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“…The drop in consumption occurs because the increase in labor effort due to banks hiring raises marginal cost of labor ( c is convex), hence increasing the price of market‐1 consumption. This is similar to the pricing externality through the marginal cost channel in Chiu, Dong, and Shao (). However, as i keeps rising, consumption in the monetary equilibrium drops below consumption in the banking equilibrium.…”

Section: Resultssupporting

confidence: 55%

“…Welfare is higher without banks if:

\begin{matrix} true \\ right α u (q_{0}) - (1 - α) c (N_{0}) > α u (q_{1}) - (1 - α) c (N_{1}) . \end{matrix}

q_{1} \leq q_{0}

, then banks clearly reduce welfare since agents do not consume more but work more, since

N_{1} > N_{0}

. If, instead,

q_{1} > q_{0}

, then the curvature of the cost function c matters since

N_{1} > N_{0}

and therefore it is the marginal cost that matters here—a finding that is similar to the one presented in Chiu, Dong, and Shao (). Here, welfare with banks is below welfare without banks if the additional utility (generated by the extra consumption

q_{1} - q_{0}

) is less than the additional cost associated with the extra labor effort

N_{1} - N_{0}

.…”

Section: Resultssupporting

confidence: 51%

“…This is likely when the consumption increment is small, which happens if inflation is sufficiently low, as in that case consumption without banks is already close to the efficient amount

q^{*}

. Notice also that if the cost is linear, then this channel disappears much as it happens in Chiu, Dong, and Shao ().…”

Section: Resultsmentioning

confidence: 97%

“…We are also related to microfounded studies that have investigated the welfare implications of the availability of credit in a BCW environment, albeit without explicitly modeling labor costs for banks. Among them, Chiu, Dong, and Shao () find that credit arrangements can be welfare reducing in competitive markets. That is because high consumption by credit users drives up the price level, thus reducing consumption by money users who are subject to a binding liquidity constraint.…”

mentioning

confidence: 99%

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Monetary Equilibrium and the Cost of Banking Activity

Boel¹,

Camera²

2019

J of Money Credit Banking

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We investigate the effects of banks' operating costs on allocations and welfare in a low interest rate environment. We introduce an explicit production function for banks in a microfounded model where banks employ labor resources, hired on a competitive market, to run their operations. In equilibrium, this generates a spread between interest rates on loans and deposits, which reflects the underlying monetary policy and the efficiency of financial intermediation. In a deflation or low-inflation environment, equilibrium deposits yield zero returns. Hence, banks soak up labor resources to offer deposits that do not outperform idle balances, thus reducing aggregate efficiency.JEL codes: C70, D40, E30, J30

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Section: Resultssupporting

confidence: 55%

“…Welfare is higher without banks if:

\begin{matrix} true \\ right α u (q_{0}) - (1 - α) c (N_{0}) > α u (q_{1}) - (1 - α) c (N_{1}) . \end{matrix}

q_{1} \leq q_{0}

, then banks clearly reduce welfare since agents do not consume more but work more, since

N_{1} > N_{0}

. If, instead,

q_{1} > q_{0}

, then the curvature of the cost function c matters since

N_{1} > N_{0}

q_{1} - q_{0}

) is less than the additional cost associated with the extra labor effort

N_{1} - N_{0}

.…”

Section: Resultssupporting

confidence: 51%

“…This is likely when the consumption increment is small, which happens if inflation is sufficiently low, as in that case consumption without banks is already close to the efficient amount

q^{*}

. Notice also that if the cost is linear, then this channel disappears much as it happens in Chiu, Dong, and Shao ().…”

Section: Resultsmentioning

confidence: 97%

mentioning

confidence: 99%

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Monetary Equilibrium and the Cost of Banking Activity

Boel¹,

Camera²

2019

J of Money Credit Banking

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“…Berentsen et al (2014),Chiu et al (2018), and Rojas Breu (2013) get similar pecuniary externalities when agents have differing abilities to pay for goods. However, at the ZLB the pecuniary externality disappears in their models whereas that is not the case in our environment.…”

mentioning

confidence: 97%

Stabilization Policy at the Zero Lower Bound

Boel

Waller

2019

Int Economic Review

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We construct a monetary economy with aggregate liquidity shocks and heterogeneous idiosyncratic preference shocks. In this environment, not all agents are satiated at the zero lower bound (ZLB) even when the Friedman rule is the best interest‐rate policy the central bank can implement. As a consequence, central bank stabilization policy, which takes the form of repo arrangements in response to aggregate demand shocks, temporarily relaxes the liquidity constraint of impatient agents at the ZLB. Due to a pecuniary externality, this policy may have beneficial general equilibrium effects for patient agents even if they are unconstrained in their money balances.

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The societal benefit of a financial transaction tax

Berentsen

Huber

Marchesiani

2016

European Economic Review

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We provide a novel justi…cation for a …nancial transaction tax for economies, where agents face stochastic consumption opportunities. A …nancial transaction tax makes it more costly for agents to readjust their portfolios of liquid and illiquid assets in response to these liquidity shocks, which increases the demand for-and the price of liquid assets. The higher price improves liquidity insurance and welfare for other market participants. We calibrate the model to U.S. data and …nd that the optimal …nancial transaction tax is 1.6 percent and that it reduces the volume of …nancial trading by 17 percent.

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On the Welfare Effects of Credit Arrangements

Cited by 13 publications

References 30 publications

Monetary Equilibrium and the Cost of Banking Activity

Monetary Equilibrium and the Cost of Banking Activity

Stabilization Policy at the Zero Lower Bound

The societal benefit of a financial transaction tax

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