Banking in General Equilibrium

Ben S. Bernanke, Mark L. Gertler

NBER Working Paper No. 1647
Issued in June 1985
NBER Program(s):   EFG

This paper attempts to provide a step towards understanding the role of financial intermediaries ("banks") in aggregate economic activity. We first develop a model of the intermediary sector which is highly simplified, but rich enough to motivate several special features of bauks. Of particular importance in our model is the assumption that banks are more efficient than the public in evaluating and auditing certain information --intensive loan projects. Banks are also assumed to have private information about their investments, which motivates the heavy reliance of banks on debt rather than equity finance and their need for buffer stock capital. We embed this intermediary sector in a general equilibrium framework, which includes consumers and a non-banking investment sector. Mainly because banks have superior access to some investments, factors affecting the size or efficiency of banking will also have an impact on the aggregate economy. Among the factors affecting intermediation, we show, are the adequacy of bank capital, the riskiness of bank investments, and the costs of bank monitoring. We also show that our model is potentially useful for understanding the macroeconomic effects of phenomena such as financial crises, disintermediation, banking regulation, and certain types of monetary policy.

download in pdf format
   (808 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w1647

Published: Bernanke, Ben and Mark Gertler. "Banking and Macroeconomic Equilibrium," New Approaches to Monetary Economics, ed. W. Barnett and K. Singleton, New York: Cambridge University Press, 1987. with Mark Gertler

Users who downloaded this paper also downloaded these:
Bernanke and Gertler w2015 Agency Costs, Collateral, and Business Fluctuations
Bernanke and Gertler w2318 Financial Fragility and Economic Performance
Gorton and Winton w5244 Bank Capital Regulation in General Equilibrium
Bernanke, Gertler, and Gilchrist w6455 The Financial Accelerator in a Quantitative Business Cycle Framework
Gertler w2559 Financial Structure and Aggregate Economic Activity: An Overview
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us