MEASURING FINANCIAL SERVICE OUTPUT AND PRICES IN COMMERCIAL BANKING

Despite the importance of commercial banks as a major provider of financial services, a bank output price index for financial services has not been developed. This paper derives such an index from the economic theory of financial firms and the application of the user cost of money concept. The derived index is superlative, non-parametric and of the Tornqvist type. An empirical application using the Federal Reserve's functional cost analysis data for banks with deposits over 200 million dollars shows that these banks experienced an output growth of 7% over the years 1985-88 and financial services prices declined by 2%.