User Cost Derivation for Financial Firms

Abstract

The user cost of a financial good is defined as the net effective cost of holding one unit of services per time period. In the context of a consumer decision model Diewert [1974b], Donovan [1978] and Barnett [1978, 1980, 1981, 1987] have derived user cost formulae for interest bearing and non-interest bearing monetary assets. These models are based on the theory of intertemporal consumer demand of Irving Fisher [1930], and formulated in discrete time. This chapter derives complete user costs for balance sheet items held by financial institutions in the context of an intertemporal producer decision model.