Abstract
We use a dynamic general equilibrium model where banks are treated as profit maximizing firms. We examine the behavior of the model when there are technological innovations that are specific to the banking industry as well as technological innovations in nonbank firms. In a stochastic simulation experiment where the technological shocks in banks and the technological shocks in nonbank firms are identical and perfectly correlated, we are able to approximately replicate the contemporaneous correlation between banks’ investment and real output and the contemporaneous correlation between work hours in banks and real output that we see in the data. With one exception, the correlations between banks’ investment and the past and future values of real output that we obtained with our model have the same sign as in the data. With two exceptions, the correlations between work hours in banks and the past and future values of real output that we obtained have the same sign as in the data.
Highlights
Over the past two decades, we have witnessed the appearance of several technological innovations which have increased productivity in most sectors of the economy
With one exception, the cross-correlations between banks’ investment and the past and future values of real output that we obtained have the same sign that they have in the data
With two exceptions, the cross-correlations between hours of work in banks and the past and future values of real output that we obtained have the same sign that they have in the data
Summary
Over the past two decades, we have witnessed the appearance of several technological innovations which have increased productivity in most sectors of the economy. We develop a dynamic general equilibrium model with two industries (physical output industry and banking industry) and two factors of production (capital and labour) Both factors are perfectly mobile between sectors. A positive shock in the firms’ technology has a stronger impact on investment by firms in our model than it has in the zero growth King, Plosser and Rebelo This happens because in our model the existence of a stock of capital in the banking industry creates the possibility of transferring some capital from the banking industry into the physical output industry.
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