Abstract: Financial institutions provide their customers a variety of unpriced
services and cover their costs through interest margins—the interest rates they
receive on assets are generally higher than the rates they pay on liabilities. In
particular, banks pay below-public-market interest rates on deposits while
charging above-public-market rates on loans. Various authors have suggested
that this situation allows one to measure the real quantity of financial services
implicitly provided as proportional to the real stocks of financial assets held by
consumers. We present a general-equilibrium Baumol-Tobin model where
households need bank services to purchase consumption goods. Bank deposits
are the single medium of exchange in the economy. The model shows that
financial services are proportional to the stocks of assets only under restrictive
conditions, including constant technologies in the financial sector. In contrast,
measuring real financial output by directly counting the flow of actual services
is a robust method that is unaffected by technological changes.