scholarly journals Money creation under full-reserve banking: a stock–flow consistent model

2018 ◽  
Vol 43 (5) ◽  
pp. 1219-1249 ◽  
Author(s):  
Patrizio Lainà
Keyword(s):  
Interest Rates ◽  
Government Spending ◽  
Banking System ◽  
Large Change ◽  
Real Economy ◽  
Consistent Model ◽  
Safety Margins ◽  
Money Creation ◽  
Reserve Banking ◽  
Stock Flow

Abstract This paper presents a stock–flow consistent model of full-reserve banking. The paper investigates money creation through government spending in a full-reserve banking system. The results are contrasted against the cases in which government spending is increased under full-reserve banking without money creation and under endogenous money, that is, the current monetary system. It is found that output, employment and inflation evolve almost identically. In contrast to other cases, money creation in a full-reserve banking system leads to a permanent reduction in consolidated government debt. Monetary policy transmits effectively as an increase in central bank reserves translates into an almost equal increase in demand deposits. Furthermore, an unusually large change in the money supply induces only smooth and relatively small changes in interest rates. In addition, the paper compares three additional ways to create money. Money creation through tax cuts or citizen’s dividend generates roughly the same results as creating money through government spending. In contrast, money creation through quantitative easing affects only monetary aggregates and interest rates but not the real economy. Although in every money creation experiment banks are able to fully satisfy the demand for loans, temporary credit crunches can occur under full-reserve banking. The occurrence of credit crunches depends on changes in private behaviour and economic policy as well as safety margins adopted by banks.

The end of Alchemy of Finance and Sovereign Money (on the books by M. King “The end of Alchemy: Money, Banking and the Future of the Global Economy” and by J. Huber “Sovereign Money. Beyond Reserve Banking”)

2017 ◽  
pp. 131-141 ◽  
Author(s):  
V. Yefimov
Keyword(s):  
Economic Policy ◽  
Central Bank ◽  
Institutional Theory ◽  
Money Supply ◽  
Government Spending ◽  
Global Economy ◽  
Private Banks ◽  
Money Creation ◽  
Ministry Of Finance ◽  
Reserve Banking

The review discusses the institutional theory of money considered in the books by King and Huber, and the conclusions that follow from it for economic policy. In accordance with this theory, at present the most of the money supply is created not by the Central Bank but by private banks. When a bank issues a loan, new money is created, and when the loan is repaid this money is destructed. The concept of sovereign money involves the monopoly of money creation of the central bank. In this case the most of newly created money is handed over to the ministry of finance to implement government spending.

scholarly journals Does the Interest Rate Form Business Cycle?

2019 ◽  
Vol 4 (1) ◽  
pp. 29-34
Author(s):  
Bijan Bidabad ◽  
Abul Hassan
Keyword(s):  
Interest Rate ◽  
Business Cycle ◽  
Interest Rates ◽  
Banking System ◽  
Real Economy ◽  
Short Term ◽  
The Usa ◽  
Rate Form ◽  
The Interest Rate

Dynamic structural behavior of depositor, bank and borrower and the role of banks in forming business cycle are investigated. We test the hypothesis that does banks behavior make oscillations in the economy through the interest rate. By dichotomizing banking activities into two markets of deposit and loan, we show that these two markets have non-synchronized structures, and this is why the money sector fluctuation starts. As a result, the fluctuation is transmitted to the real economy through saving and investment functions. Empirical results assert that in the USA, the banking system creates fluctuations in the money sector and real economy as well through short-term interest rates

scholarly journals Central Banks

2021 ◽  
pp. 11-28
Author(s):  
Ulrich Bindseil ◽  
Alessio Fotia
Keyword(s):  
Central Bank ◽  
Commercial Banks ◽  
Balance Sheet ◽  
Banking System ◽  
Central Banks ◽  
Reserve Requirement ◽  
Money Creation ◽  
Reserve Banking ◽  
Bank Money

AbstractThis chapter develops further the role of a central bank and its interplay with commercial banks. Together, the two ensure the provision of liquidity to the economy, such that the real sectors are shielded from flows of funds originating from household and investors. We also disaggregate the banking system into two banks to represent deposit flows between banks and their impact on the central bank’s balance sheet, and to distinguish between what we call “relative” and “absolute” central bank intermediation. We then integrate deposit money creation by commercial banks into our system of financial accounts, and revisit some old debates, such as the limits of bank money creation and the role of related parameters that the central bank can set (not only the reserve requirement ratio, but also the collateral framework). Finally, we explain the concepts of “plain money” and “full reserve banking” within the financial accounts, and also discuss in this framework the recent proposals regarding central bank digital currency (CBDC).

Dynamic lag structure of deposits and loans interest rates and business cycles formation

2017 ◽  
Vol 25 (2) ◽  
pp. 114-132
Author(s):  
Bijan Bidabad ◽  
Abul Hassan
Keyword(s):  
Interest Rate ◽  
Business Cycles ◽  
Interest Rates ◽  
Banking System ◽  
Real Economy ◽  
Short Term ◽  
Structural Dynamic ◽  
Content Type ◽  
The Real

Purpose This paper aims to study the structural dynamic behaviour of the depositors, banks and investors and the role of banks in the business cycles. The authors test the hypothesis: do banks’ behaviour make oscillations in the economy via interest rate? Design/methodology/approach The authors dichotomized banking activities into two markets: deposit and loan. The first market forms deposit interest rate, and the second market forms credit interest rate. The authors show that these two types of interest rates have non-synchronized structures, and that is why money sector fluctuation starts. As a result, the fluctuation is transferred to the real economy through saving and investment functions. Findings The empirical results show that in the USA, the banking system creates fluctuations in money and real economy, as well as through interest rates. Short-term interest rates had complex roots in their characteristic, while medium and long-term interest rates, though they were second-order difference equations, had real characteristic roots. However, short-term interest rates are the source of oscillation and form the business cycles. Research limitations/implications The authors tested the hypothesis for USA economy, while it needs to be tested for other economies as well. Practical implications The results show that though the source of fluctuations in the real economy comes from short-term interest rates, medium- and long-term interest rates dampen real economy fluctuations and also work as economic stabilisers. Originality/value Regarding the applied method, the topic is new.

The Future of Monetary Reform and the Real Economy

2013 ◽  
pp. 307-338
Keyword(s):  
Interest Rates ◽  
Gold Standard ◽  
Formal Model ◽  
Banking System ◽  
Real Economy ◽  
Monetary Reform ◽  
The Real ◽  
Monetary System ◽  
Analytical Result ◽  
Unity Of Knowledge

The further analytical result derived from the previous chapters on the money and real economy relationship with financial bridging in a gold-standard system is now further extended to the requirement of the 100% Reserve Requirement Monetary System with the Gold-Standard. The formal model in this regard is developed in order to bring out the power of unity of the ethical worldview of avoiding interest rates and its replacement by trade instruments. The relationship between the Central Bank, commercial banks, and the real economy with the interest-replacing trade instruments is explained. The resulting configuration of the financial and banking system in this regard under the episteme of unity of knowledge is made to explain how stabilization is attained in this same kind of epistemic worldview and its monetary and real economy interrelationship. Thus, the socio-cybernetic worldview of pervasive complementarities, equivalently participation, representing unity of knowledge in the good things of life, is once again expounded.

scholarly journals Fiscal Policy and Deficit Financing: Islamic Perspectives

2019 ◽  
Vol 32 (1) ◽  
pp. 79-85 ◽  
Author(s):  
Habib Ahmed Habib Ahmed
Keyword(s):  
Fiscal Policy ◽  
Public Goods ◽  
Interest Rates ◽  
Government Spending ◽  
Capital Expenditures ◽  
Productive Capacity ◽  
Real Economy ◽  
Government Services ◽  
Deficit Financing ◽  
The Government

Using deficit financing by increasing borrowing at lower interest rates has the potential to increase debt to levels that are not sustainable and can create further economic problems in the longer term. To understand the Islamic perspective on deficit financing, two features of government spending need to be recognized. First, government spending can be distinguished as current and capital expenditures. Second, the objectives of fiscal policy and government spending can be viewed as redistribution of income, expenditures to provide government services, provision of public goods that markets fail to provide, and providing infrastructure that enhance the productive capacities in the economies. While current spending should be covered by zakāh (distributive role) and taxes (providing government services and public goods), capital expenditures on infrastructure can be funded by issuing ṣukūk. During recessions, the government can use counter-cyclical spending of zakāh and tax revenues to increase current spending and issue ṣukūk to raise funds for investments to enlarge capital expenditures in infrastructure projects. This approach of moving the economy out of recession puts a limit on excessive debt by linking the funds raised with the real economy and helps increase the productive capacity in the longer term by filling the infrastructure gaps.

Endogenous Nature of Money Supply in Conditions of Financial Assets Digitalization

2020 ◽  
Vol 2020 (2) ◽  
pp. 28-45
Author(s):  
Oleg Lunyakov
Keyword(s):  
Money Supply ◽  
Banking System ◽  
Income Growth ◽  
Financial Assets ◽  
Financial Instruments ◽  
Digital Form ◽  
Household Portfolio ◽  
Endogenous Money ◽  
Money Creation ◽  
Stock Flow

The paper discusses the endogenous nature of money supply for national economy in conditions of financial assets digitalization. The relevance of the research is justified by a changing economic environment in which money and other financial assets can act in a digital form. The objective of the study is to describe the possible changes in the money supply with adding digital financial assets to the household portfolio with the use of endoteric approach. We use the post-Keynesian postulates, in particular, horizontalizm, to describe the process of endogenous money creation by the banking system through lending. The underlying methodology is based on the use of stock-flow consistent (SFC) modeling approach. Unlike previous research, the article considers a wider range of financial instruments in portfolios of macroeconomic agents, which made it possible to specify the demand for credit more fully. It is concluded that the adding “new” digital financial assets to portfolios is likely to affect the expansion of savings diversification, rather than endogenous money supply. The importance of real output and disposable income growth for changing in savings, investments and the demand for credit is outlined.

scholarly journals THE BROAD CONSEQUENCES OF NARROW BANKING

2019 ◽  
Vol 22 (01) ◽  
pp. 1950007
Author(s):  
MATHEUS R. GRASSELLI ◽  
ALEXANDER LIPTON
Keyword(s):  
Banking Sector ◽  
Asymptotic Properties ◽  
Banking System ◽  
Fractional Reserve Banking ◽  
Fractional Reserve ◽  
Time Deposits ◽  
Demand Deposits ◽  
Bank Reserves ◽  
Reserve Banking ◽  
Stock Flow

We investigate the macroeconomic consequences of narrow banking in the context of stock-flow consistent models. We begin with an extension of the Goodwin–Keen model incorporating time deposits, government bills, cash, and central bank reserves to the base model with loans and demand deposits, and use it to describe a fractional reserve banking system. We then characterize narrow banking by a full reserve requirement on demand deposits and describe the resulting separation between the payment system and lending functions of the resulting banking sector. By way of numerical examples, we explore the properties of fractional and full reserve versions of the model and compare their asymptotic properties. We find that narrow banking does not lead to any loss in economic growth when both versions of the model converge to a finite equilibrium, while allowing for more direct monitoring and prevention of financial breakdowns in the case of explosive asymptotic behavior.

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