Financial Intermediation, Monetary Uncertainty and Bank Interest Margins

Abstract

This paper studies a simple model of financial intermediation in order to understand how the lending-borrowing spread (or interest margin) charged by financial intermediaries is determined in equilibrium in a monetary economy. The main conclusion of the paper concerns the effect on the spread of changes in the distribution of monetary innovations. Thus, changes in the monetary-policy-rule followed by the Central Bank which alter the volatility of inflation will have important effects on the interest-margin and also on the amount of credit available to investors. A cross-section empirical analysis strongly supports our hypothesis.