Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/110037
Authors: 
Bernardo, Giovanni
Campiglio, Emanuele
Year of Publication: 
2013
Series/Report no.: 
Working Paper, Levy Economics Institute 777
Abstract: 
This paper presents a small macroeconomic model describing the main mechanisms of the process of credit 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 in 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.
Subjects: 
Banking System
Credit Creation
Growth
Aggregate Demand
Macroeconomic Modeling
JEL: 
E20
E51
G21
O42
Document Type: 
Working Paper

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