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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

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Abstract

This paper presents a small macroeconomic model describing the main mechanisms of the process of 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 on 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. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Giovanni Bernardo & Emanuele Campiglio, 2014. "A simple model of income, aggregate demand and the process of credit creation by private banks," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 41(3), pages 381-405, August.
  • Handle: RePEc:kap:empiri:v:41:y:2014:i:3:p:381-405
    DOI: 10.1007/s10663-013-9239-6
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    References listed on IDEAS

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    1. Mathias Binswanger, 2009. "Is there a growth imperative in capitalist economies? a circular flow perspective," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 31(4), pages 707-727, July.
    2. Flint Brayton & Peter A. Tinsley, 1996. "A guide to FRB/US: a macroeconomic model of the United States," Finance and Economics Discussion Series 96-42, Board of Governors of the Federal Reserve System (U.S.).
    3. 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, vol. 29(6), pages 2597-2614.
    4. Eugenio Caverzasi & Antoine Godin, 2013. "Stock-flow Consistent Modeling through the Ages," Economics Working Paper Archive wp_745, Levy Economics Institute.
    5. David H. Romer, 2000. "Keynesian Macroeconomics without the LM Curve," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 149-169, Spring.
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    Citations

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    Cited by:

    1. Campiglio, Emanuele, 2016. "Beyond carbon pricing: The role of banking and monetary policy in financing the transition to a low-carbon economy," Ecological Economics, Elsevier, vol. 121(C), pages 220-230.
    2. Xing, Xiaoyun & Xiong, Wanting & Chen, Liujun & Chen, Jiawei & Wang, Yougui & Stanley, H. Eugene, 2018. "Money circulation and debt circulation: A restatement of quantity theory of money," Economics Discussion Papers 2018-1, Kiel Institute for the World Economy (IfW).
    3. Jacob Assa, 2017. "Leveraged Growth: Endogenous Money and Speculative Credit in a Stock-flow Consistent Measure of Output," Working Papers 1727, New School for Social Research, Department of Economics.
    4. Bernardo, Giovanni & D'Alessandro, Simone, 2014. "Transition to sustainability? Feasible scenarios towards a low-carbon economy," MPRA Paper 53746, University Library of Munich, Germany.
    5. Marc Lavoie, 2014. "A comment on ‘Endogenous money and effective demand’: a revolution or a step backwards?," Review of Keynesian Economics, Edward Elgar Publishing, vol. 2(3), pages 321-332, July.
    6. Rezai, Armon & Stagl, Sigrid, 2016. "Ecological Macreconomics: Introduction and Review," Ecological Economic Papers 4803, WU Vienna University of Economics and Business.
    7. Armon Rezai & Sigrid Stagl, 2016. "Ecological Macreconomics: Introduction and Review," Ecological Economics Papers ieep9, Institute of Ecological Economics.
    8. Li, Boyao, 2017. "The impact of the Basel III liquidity coverage ratio on macroeconomic stability: An agent-based approach," Economics Discussion Papers 2017-2, Kiel Institute for the World Economy (IfW).

    More about this item

    Keywords

    Banking system; Credit creation; Growth; Aggregate demand; Macroeconomic modeling;

    JEL classification:

    • 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, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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