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Money creation and financial instability: An agent-based credit network approach

  • Lengnick, Matthias
  • Krug, Sebastian
  • Wohltmann, Hans-Werner

We pick up the standard textbook approach of money creation and develop a simple agent-based alternative. We show that our model is well suited to explain the endogenous creation of money. Although more general, our model still contains the standard results as a limiting case. We also uncover a potential instability that is hidden in the standard approach but easily recognized within a strict individual-based and stock-flow consistent version. We show in detail how individual interactions build up systemic risk and how banking crises are triggered by the maturity mismatch of different cash-flows and spread by the depreciation of non-performing loans (e.g. interbank- or government debt).

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Paper provided by Christian-Albrechts-University of Kiel, Department of Economics in its series Economics Working Papers with number 2012-15.

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Date of creation: 2012
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Handle: RePEc:zbw:cauewp:201215
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