Optimal Bank Behavior under Uncertain Inflation

Authors

  • YORAM LANDSKRONER,

  • DAVID RUTHENBERG

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    • School of Business Administration, Hebrew University of Jerusalem and Bank of Israel and Hebrew University of Jerusalem, respectively. We would like to thank J. Paroush for his helpful comments.

ABSTRACT

In this paper, we derive a model of the individual banking firm facing stochastic inflation. The bank is considered as a depository financial intermediary operating in the primary market as a multiproduct price discriminating firm. A secondary market is also considered where liquidity surpluses and deficits are traded. Two types of assets and liabilities are assumed: deposits and loans linked to a general price level and nonlinked instruments. Effects of changes in the parameters such as inflation rate and variability, reserve requirements are analyzed.

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