Money creation within the macroeconomy: An integrated model of banking

We develop a monetary framework to describe a macroeconomic system consisting of households, firms, the government, the central bank, and banks. The framework is based on the balance sheets of all sectors, in which the monetary flows between them govern the dynamics of the items. The whole system evolves over time and eventually attains a stationary state. Using this integrated model, we find that all flows coming from banks, including issuing loans, purchasing bonds, paying dividends, and paying interest on deposits, create money. On the contrary, all flows going to banks, including receiving repayments, selling bonds, issuing equities, and receiving interest on loans and bonds, destroy money. These flows associated with the behaviors of money creation and destruction are core factors that determine stationary states. We show the relationships between these flows and stationary stocks, especially the quantity of money. We also present the dependence of final output on these flows. We analyze the effects of monetary policies, such as changing the rate on loans and the amount of bank reserves. We find that an increase in the rate may yield higher output, while injecting more reserves may result in lower output.