Bank behavior and monetary policies

We extend Freixas and Rochet (1997) to two-stage game: In the first stage each bank simultaneously decides on amonts of deposits. uThen each bank decides on loan amounts in the second stage. Each stage is a Cournot game in quantity. Scope economies between loans and deposits also arise explicitly in our model. We show that in the case where large economies of scope an increase in reserve rate rate leads to an decrease in the interest rate on deposits and to an increase in the interest rate on loans. As a result of these changes in interest rates, the utility of both borrowers and depositors is proved diminished.