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Keynes' Inactive Balances, the Banking Sector and Effective Demand




This paper offers a fresh look at the economic theories advanced by Keynes. Keynes correctly asserted that in a fractional reserve banking system supply could not create its own demand when agents held time and savings deposits as a longrun store and entrepreneurs were engaging in the disinvestment of capital. There are two fundamental problems. The first, disinvestment creates a disjoint between ex-ante supply and current period income; the second, the banking sector cannot transfer real resources, therefore, it cannot intermediate savings. Thus, the economy requires demand injections, financed by bank debt, if it is maintain economic activity.

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  • Christy Huebner Caridi, 2002. "Keynes' Inactive Balances, the Banking Sector and Effective Demand," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2002-07, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
  • Handle: RePEc:epa:cepawp:2002-07

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    Keynes; fractional reserve banking; capital stock; time and savings deposits; inactive balances;

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