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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

Abstract

This paper presents a small macroeconomic model describing the main mechanisms of the process of credit 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 in 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.

Suggested Citation

  • Giovanni Bernardo & Emanuele Campiglio, 2013. "A Simple Model of Income, Aggregate Demand, and the Process of Credit Creation by Private Banks," Economics Working Paper Archive wp_777, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_777
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    References listed on IDEAS

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    1. repec:dgr:rugsom:09002 is not listed on IDEAS
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    Cited by:

    1. Rezai, Armon & Stagl, Sigrid, 2016. "Ecological Macreconomics: Introduction and Review," Ecological Economic Papers 9, WU Vienna University of Economics and Business.
    2. 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.
    3. 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.
    4. 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 Kiel).
    5. Xing, Xiaoyun & Xiong, Wanting & Guo, Jinzhong & Wang, Yougui, 2021. "The role of debt in aggregate demand," Finance Research Letters, Elsevier, vol. 39(C).
    6. 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.
    7. 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 Kiel).
    8. Bernardo, Giovanni & D'Alessandro, Simone, 2014. "Transition to sustainability? Feasible scenarios towards a low-carbon economy," MPRA Paper 53746, University Library of Munich, Germany.

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    More about this item

    Keywords

    Banking System; Credit Creation; Growth; Aggregate Demand; Macroeconomic Modeling;
    All these keywords.

    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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