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The macroeconomic implications of financial deregulation

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  • Melitz, Jacques
  • Bordes, Christian

Abstract

This paper explores the possible macroeconomic consequences of financial deregulation in an institutional environment where deregulation raises risks in banking. The central bank is assumed to maximize an objective function an argument of which is the probability of bank failure. It is then shown that the usual trade-offs between policy objectives imply that financial deregulation will affect optimal monetary policy: deregulation will lead to more interest rate smoothing than would otherwise be the case. Because of restricted entry into banking, deregulation will also call for some inflation. The framework for the discussion is a Poole model with a Lucas supply function and imperfect wage indexation.
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Suggested Citation

  • Melitz, Jacques & Bordes, Christian, 1991. "The macroeconomic implications of financial deregulation," European Economic Review, Elsevier, vol. 35(1), pages 155-178, January.
    • Handle: RePEc:eee:eecrev:v:35:y:1991:i:1:p:155-178
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    Cited by:

    1. ismail, abdul & smith, peter, 1993. "Monetary Policy and Commercial Banks: An Overview," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 27, pages 29-55.
    2. Jean-Marie Viaene, 1992. "Real effects of the 1992 financial deregulation," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 128(4), pages 615-638, December.

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