Staff Report 153

Banking in Computable General Equilibrium Economies

Edward C. Prescott | Senior Monetary Advisor
Fernando Alvarez | University of Chicago
Javier Díaz-Giménez
Terry J. Fitzgerald | Senior Economist and Vice President

Published March 1, 1992

In this paper we develop a computable general equilibrium economy that models the banking sector explicitly. Banks intermediate between households and between the household sector and the government sector. Households borrow from banks to finance their purchases of houses and they lend to banks to save for retirement. Banks pool households’ savings and they purchase interest-bearing government debt and non-interest bearing reserves. We use this structure to answer two sets of questions: one normative in nature that evaluates the welfare costs of alternative monetary and tax policies, and one positive in nature that studies the real effects of following a procyclical interest-rate policy rule.

Published In: Journal of Economic Dynamics and Control (Num 16, 1992, pp. 533-559)

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