Keynes' Inactive Balances, the Banking Sector and Effective Demand
AbstractThis paper offers a fresh look at the economic theories advanced by Keynes. Keynes correctly asserted that in a fractional reserve banking system supply could not create its own demand when agents held time and savings deposits as a longrun store and entrepreneurs were engaging in the disinvestment of capital. There are two fundamental problems. The first, disinvestment creates a disjoint between ex-ante supply and current period income; the second, the banking sector cannot transfer real resources, therefore, it cannot intermediate savings. Thus, the economy requires demand injections, financed by bank debt, if it is maintain economic activity.
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Bibliographic InfoPaper provided by Schwartz Center for Economic Policy Analysis (SCEPA), The New School in its series SCEPA Working Papers with number 2002-07.
Length: 21 pages
Date of creation: May 2002
Date of revision:
Keynes; fractional reserve banking; capital stock; time and savings deposits; inactive balances;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-09-21 (All new papers)
- NEP-CBA-2002-09-21 (Central Banking)
- NEP-HPE-2002-09-21 (History & Philosophy of Economics)
- NEP-PKE-2002-09-21 (Post Keynesian Economics)
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