A Theory of Production for the Financial Firm

1. Front Matter

   Pages i-ix

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2. Introduction and Summary

   • Diana Hancock

   Pages 1-8

3. Issues in Technology and Regulation of Financial Firms

   • Diana Hancock

   Pages 9-26

4. User Cost Derivation for Financial Firms

   • Diana Hancock

   Pages 27-34

5. A Model of the Financial Firm

   • Diana Hancock

   Pages 35-50

6. Data and Data Construction

   • Diana Hancock

   Pages 51-85

7. Specification and Hypothesis Testing

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   Pages 87-108

8. Empirical Results

   • Diana Hancock

   Pages 109-141

9. Back Matter

   Pages 143-157

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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.

• Bank
• Investment
• econometrics
• monetary policy
• production

• Department of Finance, Leavey School of Business and Administration, Santa Clara University, USA

  Diana Hancock

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