Stochastic reserve losses,bank credit expansion and Bayesian information

In standard bank credit expansion models the optimal amount of new demand deposits to create is derived for a given level of uncertainty of reserves losses. In this paper, I analyze in detail, the microeconomics of bank credit expansion in which the degree of uncertainty is a decision variable for the bank to determine. First, the role of information in adjusting the bank's expected profit is established and its impact on demand deposit creation is discussed. I then derive the optimal demand for information and its comparative static behavior is examined. Finally, I discuss the major implications of considering the level of uncertainty as a decision variable in the bank credit expansion literature.