Stochastic reserve losses,bank credit expansion and Bayesian information |
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Authors: | Bryan E. Stanhouse |
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Affiliation: | University of Notre Dame, Notre Dame, IN 46556, USA |
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Abstract: | 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. |
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