A Simple Model of Income, Aggregate Demand, and the Process of Credit Creation by Private Banks
AbstractThis paper presents a small macroeconomic model describing the main mechanisms of the process of credit creation by the private banking system. The model is composed of a core unit--where the dynamics of income, credit, and aggregate demand are determined--and a set of sectoral accounts that ensure its stock-flow consistency. In order to grasp the role of credit and banks in the functioning of the economic system, we make an explicit distinction between planned and realized variables, thanks to which, while maintaining the ex-post accounting consistency, we are able to introduce an ex-ante wedge between current aggregate income and planned expenditure. Private banks are the only economic agents capable of filling this gap through the creation of new credit. Through the use of numerical simulation, we discuss the link between credit creation and the expansion of economic activity, also contributing to a recent academic debate on the relation between income, debt, and aggregate demand.
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Bibliographic InfoPaper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_777.
Date of creation: Oct 2013
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Banking System; Credit Creation; Growth; Aggregate Demand; Macroeconomic Modeling;
Other versions of this item:
- Giovanni Bernardo & Emanuele Campiglio, 2014. "A simple model of income, aggregate demand and the process of credit creation by private banks," Empirica, Springer, vol. 41(3), pages 381-405, August.
- E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- O42 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-11-16 (All new papers)
- NEP-BAN-2013-11-16 (Banking)
- NEP-CMP-2013-11-16 (Computational Economics)
- NEP-MAC-2013-11-16 (Macroeconomics)
- NEP-PKE-2013-11-16 (Post Keynesian Economics)
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