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Credit and money creation from the integrated accounts perspective

Author

Listed:
  • Tomas Ramanauskas

    () (Bank of Lithuania)

  • Skirmante Matkenaite

    () (Bank of Lithuania)

  • Virgilijus Rutkauskas

    () (Bank of Lithuania)

Abstract

In this paper we apply the analytical integrated accounts framework to conduct a conceptual analysis of essential macrofinancial linkages. In particular, we analyse the macroeconomic mechanism of the creation of purchasing power through bank credit, explore the partial self-financing property of bank credit and the links between bank credit and money creation, and discuss the role of debt accumulation as a powerful demand-side driver of growth. We argue that creation of money and purchasing power is an indispensable corollary of bank credit issuance. Contrary to conventional wisdom, credit is not predicated on existing savings. It directly adds to domestic demand, which translates into some combination of stronger domestic economic activity, stronger foreign economic activity or higher prices, with particular configuration depending on the structural features of the economy. However, credit-driven growth may result in a systemic over-reliance on continuous debt accumulation and poses the risk of deep structural imbalances and balance sheet recessions.

Suggested Citation

  • Tomas Ramanauskas & Skirmante Matkenaite & Virgilijus Rutkauskas, 2018. "Credit and money creation from the integrated accounts perspective," Bank of Lithuania Discussion Paper Series 5, Bank of Lithuania.
  • Handle: RePEc:lie:dpaper:5
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    bank lending; credit creation; money creation; national accounts; integrated accounts; macroeconomic and financial linkages;

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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