TY  - JOUR
AU  - Wang,J. Christina
AU  - Basu,Susanto
TI  - Risk Bearing, Implicit Financial Services and Specialization in the Financial Industry
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14614
PY  - 2008
Y2  - December 2008
UR  - http://www.nber.org/papers/w14614
L1  - http://www.nber.org/papers/w14614.pdf
N1  - Author contact info:
J. Christina Wang
Federal Reserve Bank of Boston
Research Dept, T-8
600 Atlantic Avenue
Boston, Massachusetts 02210
E-Mail: Christina.Wang@bos.frb.org

Susanto Basu
Department of Economics
Boston College
140 Commonwealth Avenue
Chestnut Hill, MA 02467
Tel: 617/552-2182
Fax: 617/552-2308
E-Mail: susanto.basu@bc.edu
AB  - This paper makes three points regarding the proper measurement of the output of financial intermediaries. Two of them concern the measurement of nominal financial output, especially banking output. First, we show that, to impute the nominal value of implicitly priced financial output, it is necessary to adjust each reference rate of interest (also called “the user cost of funds”) for the risk inherent in that corresponding financial transaction. Otherwise, nominal financial output will be overstated, and the bias can be large (about 25 percent). Second, we argue that, according to finance theory, the required risk correction can be implemented practically at the level of industries (e.g., the banking sector as a whole). The third point concerns the construction of a financial services price index, and thus applies to the measurement of real output. We argue that the reference rates or the related rate spreads, which are used to impute the nominal output of financial institutions, are not the right implicit price deflators for deriving the real output of financial institutions
ER  -