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A simple model of income, aggregate demand and the process of credit creation by private banks

  • Giovanni Bernardo
  • Emanuele Campiglio

    ()

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

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File URL: http://hdl.handle.net/10.1007/s10663-013-9239-6
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Article provided by Springer in its journal Empirica.

Volume (Year): 41 (2014)
Issue (Month): 3 (August)
Pages: 381-405

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Handle: RePEc:kap:empiri:v:41:y:2014:i:3:p:381-405
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100261

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  1. 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).
  2. F. Brayton & P. 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. David H. Romer, 2000. "Keynesian Macroeconomics without the LM Curve," Journal of Economic Perspectives, 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 wp_745, Levy Economics Institute.
  5. Dieppe, Alistair & González Pandiella, Alberto & Willman, Alpo, 2011. "The ECB's New Multi-Country Model for the euro area: NMCM - simulated with rational expectations," Working Paper Series 1315, European Central Bank.
  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., vol. 31(4), pages 707-727, July.
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