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Banks Money Creation and the Transmission Mechanism of Shocks (in Persian)

Author

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  • Esfahani, Mohammadreshad

    (Faculty of Management and Economics, Sharif University of Technology, Tehran, Iran)

  • Mahmoudzadeh, Amineh

    (Department of Economics, Faculty of Management and Economics, Sharif University of Technology, Tehran, Iran)

  • Madanizadeh, Seyyed Ali

    (Department of Economics, Faculty of Management and Economics, Sharif University of Technology, Tehran, Iran)

Abstract

This paper investigates the implications of bank money creation by developing a New Keynesian model that incorporates price rigidity and financial frictions but without real rigidities. Banks play a dual role as intermediaries of loanable funds and creators of credit. Their unique ability to create credit stems from the acceptance of their liabilities as a medium of exchange by economic agents. While the microeconomics of banking literature has addressed this function as liquidity transformation, there is a lack of macro-level analysis on this topic. We compare our baseline model with two alternative models: one featuring banks solely as intermediaries of loanable funds and another based on deposit multiplier models. Our model demonstrates that when banks have access to investment deposits held by households, their money-creation power predominantly affects nominal variables in the economy.

Suggested Citation

  • Esfahani, Mohammadreshad & Mahmoudzadeh, Amineh & Madanizadeh, Seyyed Ali, 2023. "Banks Money Creation and the Transmission Mechanism of Shocks (in Persian)," The Journal of Planning and Budgeting (٠صلنامه برنامه ریزی Ùˆ بودجه), Institute for Management and Planning studies, vol. 28(2), pages 3-44, September.
    • Handle: RePEc:auv:jipbud:v:28:y:2023:i:2:p:3-44
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    More about this item

    Keywords

    Money Creation; Transmission Mechanism; Credit Creation; Money Multiplier; Financial Intermediation.;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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