A Theory of Production for the Financial Firm

1 Introduction and Summary.- 1.1 The Need for a Theory of Production for Financial Firms.- 1.2 Issues in Technology and Regulation.- 1.3 User Cost Derivation.- 1.4 A Model of the Financial Firm.- 1.5 Data and Data Construction.- 1.6 Specification and Hypothesis Testing.- 1.7 Empirical Results.- 2 Issues in Technology and Regulation of Financial Firms.- 2.1 Introduction.- 2.2 Cost Function Approach.- 2.2.1 Output Separability.- 2.2.2 Non-Joint Technology.- 2.3 Profit Function Approach.- 2.4 Outputs, Inputs, and the "Classification Problem".- 2.5 Regulations and the Financial Firm.- 2.5.1 Reserve Requirements.- 2.5.2 Interest Rate Ceilings.- 2.5.2.1 Deposit Interest Rate Ceilings.- 2.5.2.2 Loan Interest Rate Ceilings - Usary Laws.- 2.5.3 Deposit Insurance Premium Rates.- 2.6 Concluding Remarks.- 3 User Cost Derivation for Financial Firms.- 3.1 User Costs for Assets and Liabilities.- 3.2 Implementation Problems.- 3.2.1 Expectations of Future Prices.- 3.2.2 The Discounting Rate.- 3.2.3 Depreciation Rates.- 4 A Model of the Financial Firm.- 4.1 Introduction.- 4.2 An Intertemporal Production Model of the Individual Financial Firm.- 5 Data and Data Construction.- 5.1 Introduction.- 5.2 Labor Services.- 5.3 Materials Services.- 5.4 Physical Capital Services.- 5.5 User Costs for Financial Services.- 5.5.1 Assets.- 5.5.1.1 Introduction.- 5.5.1.2 Investments.- 5.5.1.3 Real Estate Mortgages.- 5.5.1.4 Installment Loans.- 5.5.1.5 Credit Card Loans.- 5.5.1.6 Commercial, Agricultural and Other Loans.- 5.5.1.7 User Cost for Aggregate Loans.- 5.5.1.8 Cash.- 5.5.2 Liabilities.- 5.5.2.1 Demand Deposits.- 5.5.2.2 Time Deposits.- 5.5.2.3 Non-Deposit Liabilities.- 5.5.2.4 Time Deposits and Borrowed Money.- 5.5.3 Financial Capital.- 5.6 Variable Profits.- 5.7 Concluding Remarks.- Appendix Functional Cost Data on Capital.- 6 Specification and Hypothesis Testing.- 6.1 Introduction.- 6.2 Profit Function and Net Supplies.- 6.3 Regularity Restrictions.- 6.4 Tests of Bank Technology.- 6.4.1 Introduction.- 6.4.2 Existence of Monetary Subaggregates.- 6.4.2.1 Introduction.- 6.4.2.2 Money Supply Definition: Cash and Demand Deposits.- 6.4.2.3 Money Supply Definition: Cash, Demand and Time Deposits.- 6.5 Econometric Issues.- 6.5.1 Exogeneity of Prices and Quantities.- 6.5.2 Pooling Time Series and Cross Section Data.- 6.5.2.1 Bank Effects.- 6.5.2.2 Branching Regulation Effects.- 6.5.2.3 Deregulation Effects.- 6.6 Concluding Remarks.- Appendix Derivation of Hessian - Variable Profit Function.- 7 Empirical Results.- 7.1 Introduction.- 7.2 Elasticities of Transformation, Demand and Supply.- 7.3 Regularity Tests.- 7.4 Estimation of Transformation, Supply and Demand Elasticities.- 7.5 Rate of Return on Capital.- 7.6 Policy Implications: Monetary Policy and Bank Behavior.- 7.6.1 Introduction.- 7.6.2 Interest Rate Effects.- 7.6.3 Reserve Requirement Costs.- 7.6.4 Deposit Insurance - FDIC Regulation.- 7.7 Tests of Monetary Aggregation.- 7.8 Concluding Remarks.