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A simple model of income, aggregate demand and the process of credit creation by private banks

Bernardo, Giovanni and Campiglio, Emanuele (2014) A simple model of income, aggregate demand and the process of credit creation by private banks. Empirica, 41 (3). 381 -405. ISSN 0340-8744

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Identification Number: 10.1007/s10663-013-9239-6

Abstract

This paper presents a small macroeconomic model describing the main mechanisms of the process of 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 on 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.

Item Type: Article
Official URL: http://link.springer.com/journal/10663
Additional Information: © 2014 Springer Science+Business Media New York
Divisions: Grantham Research Institute
Subjects: H Social Sciences > HG Finance
Sets: Research centres and groups > Grantham Research Institute on Climate Change and the Environment
Date Deposited: 06 Jan 2014 16:01
Last Modified: 19 Nov 2019 11:28
URI: http://eprints.lse.ac.uk/id/eprint/55152

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