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

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

The authors pick up the standard textbook approach of money creation and develop a simple agent-based alternative. They show that their model is well suited to explain the endogenous creation of money. Although more general, their model still contains the standard results as a limiting case. The authors 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. They 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 Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2012-61.

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Date of creation: 2012
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Handle: RePEc:zbw:ifwedp:201261
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