Skip to main content

March/April 1994, 
Vol. 76, No. 2
Posted 1994-03-01

Financial Firms' Production and Supply-Side Monetary Aggregation Under Dynamic Uncertainty

by William A. Barnett and Ge Zhou

This article focuses on the production theory of the financial firm and supply-side monetary aggregation in the framework of dynamics and risk. On the demand side, there has been much progress in applying consumer demand theory to the generation of exact monetary aggregates and integrating them into consumer demand system modeling. However, on the supply-side, monetary services are produced by financial firms through financial intermediation, and, hence, exact supply-side monetary aggregation must be based upon financial firm output aggregation. The authors derive a model of financial firm behavior under dynamic risk. They estimate the Euler equations that comprise the first-order conditions for optimal behavior by financial firms.