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A Simple Model of Income, Aggregate Demand, and the Process of Credit Creation by Private Banks

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  • Giovanni Bernardo
  • Emanuele Campiglio

Abstract

This 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 Info

Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_777.

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Date of creation: Oct 2013
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Handle: RePEc:lev:wrkpap:wp_777

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Keywords: Banking System; Credit Creation; Growth; Aggregate Demand; Macroeconomic Modeling;

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  1. Dieppe, Alistair & González Pandiella, Alberto & Willman, Alpo, 2012. "The ECB's New Multi-Country Model for the euro area: NMCM — Simulated with rational expectations," Economic Modelling, Elsevier, Elsevier, vol. 29(6), pages 2597-2614.
  2. Bezemer, Dirk, 2009. "No one saw this coming. Understanding financial crisis through accounting models," Research Report 09002, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  3. David H. Romer, 2000. "Keynesian Macroeconomics without the LM Curve," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 14(2), pages 149-169, Spring.
  4. Eugenio Caverzasi & Antoine Godin, 2013. "Stock-flow Consistent Modeling through the Ages," Economics Working Paper Archive, Levy Economics Institute wp_745, Levy Economics Institute.
  5. F. Brayton & P. Tinsley, 1996. "A guide to FRB/US: a macroeconomic model of the United States," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 96-42, Board of Governors of the Federal Reserve System (U.S.).
  6. Mathias Binswanger, 2009. "Is there a growth imperative in capitalist economies? a circular flow perspective," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., M.E. Sharpe, Inc., vol. 31(4), pages 707-727, July.
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Cited by:
  1. Bernardo, Giovanni & D'Alessandro, Simone, 2014. "Transition to sustainability? Feasible scenarios towards a low-carbon economy," MPRA Paper 53746, University Library of Munich, Germany.
  2. Emanuele Campiglio, 2014. "Beyond carbon pricing: The role of banking and monetary policy in financing the transition to a low-carbon economy," Grantham Research Institute on Climate Change and the Environment Working Papers, Grantham Research Institute on Climate Change and the Environment 160, Grantham Research Institute on Climate Change and the Environment.

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