Riksbank paper shows importance of modelling bank costs

Models should take account of the costs associated with banking activity, a working paper published on October 31 by Sveriges Riksbank finds.

Paola Boel and Gabriele Camera set out a model in which banks must pay for the labour to run their operations, which creates a cost to lending and generates a bid/ask spread for interest rates, as one would expect.

Traditional, frictionless models tend to imply banking activity boosts aggregate welfare by mobilising deposits that would otherwise be idle