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Credit Creation: The “Good”, the “Bad” and the “Ugly”

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  • Wenli Cheng

    (Monash University)

Abstract

This paper develops a stock-flow consistent model to study the effects of three types of bank credit: credit for production, credit for consumption, and credit for asset speculation.The main findings are: (1) Credit for production (the “good”) enables capital formation and the adoption of more productive technologies; (2) Credit for consumption (the “bad”) diverts some real savings from capital formation to consumption, resulting in lower total output and less individual wealth; and (3) Credit for speculation (the “ugly”) funds real wealth transfers that are unrelated to wealth creation. It can result in higher prices in the goods market, which harms all consumers including those who do not participate in asset speculation.

Suggested Citation

  • Wenli Cheng, 2025. "Credit Creation: The “Good”, the “Bad” and the “Ugly”," Monash Economics Working Papers 2025-20, Monash University, Department of Economics.
    • Handle: RePEc:mos:moswps:2025-20
    as

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    References listed on IDEAS

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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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