A General-Equilibrium Asset-Pricing Approach to the Measurement of Nominal and Real Bank Output

52 Pages Posted: 15 Jan 2009 Last revised: 10 Dec 2022

See all articles by J. Christina Wang

J. Christina Wang

Federal Reserve Bank of Boston

Susanto Basu

National Bureau of Economic Research (NBER); Boston College, College of Arts and Sciences, Department of Economics

John G. Fernald

Federal Reserve Bank of San Francisco

Multiple version iconThere are 2 versions of this paper

Date Written: December 2008

Abstract

This paper addresses the proper measurement of financial service output that is not priced explicitly. It shows how to impute nominal service output from financial intermediaries' interest income, and how to construct price indices for those financial services. We model financial intermediaries as providers of financial services which resolve asymmetric information between borrowers and lenders. We embed these intermediaries in a dynamic, stochastic, general-equilibrium model where assets are priced competitively according to their systematic risk, as in the standard consumption-based capital-asset-pricing model. In this environment, we show that it is critical to take risk into account in order to measure financial output accurately. We also show that even using a risk-adjusted reference rate does not solve all the problems associated with measuring nominal financial service output. Our model allows us to address important outstanding questions in output and productivity measurement for financial firms, such as: (1) What are the correct "reference rates" to use in calculating bank output? In particular, should they take account of risk? (2) If reference rates need to be risk-adjusted, should they be ex ante or ex post rates of return? (3) What is the right price deflator for the output of financial firms? Is it just the general price index? (4) When--if ever--should we count capital gains of financial firms as part of financial service output?

Suggested Citation

Wang, J. Christina and Basu, Susanto and Basu, Susanto and Fernald, John G., A General-Equilibrium Asset-Pricing Approach to the Measurement of Nominal and Real Bank Output (December 2008). NBER Working Paper No. w14616, Available at SSRN: https://ssrn.com/abstract=1327237

J. Christina Wang

Federal Reserve Bank of Boston ( email )

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Susanto Basu (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Boston College, College of Arts and Sciences, Department of Economics ( email )

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John G. Fernald

Federal Reserve Bank of San Francisco ( email )

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HOME PAGE: http://www.frbsf.org/economics/economists/jfernald.html

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