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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 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.

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Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_777.

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Date of creation: Oct 2013
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Handle: RePEc:lev:wrkpap:wp_777
Contact details of provider: Web page: http://www.levyinstitute.org

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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, M.E. Sharpe, Inc., vol. 31(4), pages 707-727, July.
  2. repec:dgr:rugsom:09002 is not listed on IDEAS
  3. Eugenio Caverzasi & Antoine Godin, 2013. "Stock-flow Consistent Modeling through the Ages," Economics Working Paper Archive wp_745, Levy Economics Institute.
  4. 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.).
  5. David Romer, 2000. "Keynesian Macroeconomics without the LM Curve," NBER Working Papers 7461, National Bureau of Economic Research, Inc.
  6. 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.
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