Problems in the banking sector played a seriously damaging role in the Great Recession. In fact, they continue to. This column argues that macroeconomic models were unable to explain the interaction between banks and the macro economy. The problem lies with thinking that banks create loans out of existing resources. Instead, they create new money in the form of loans. Macroeconomists need to reflect this in their models.VoxEU
Banks are not loanable-funds intermediaries: Macroeconomic implications
Zoltan Jakab, Senior Economist at the Research Department, IMF, and Michael Kumhof, Senior Research Advisor at the Research Hub, Bank of England
3 comments:
The truth is more complicated that Kumhof and Jakab suggest. It’s true that loans create deposits, but at the same time, commercial banks have to attract deposits (or funding in some other form) in order to lend, otherwise they run out of reserves. This is a chicken and egg scenario.
At the macro level, if commercial banks want to lend more and the economy is already at capacity, there just has to be extra saving (e.g. long term deposits) else demand and inflation will become excessive.
If market forces don’t raise interest rates in that scenario so as to cut lending and increase saving, then the central bank WILL RAISE interest rates so as to keep inflation in check.
"otherwise they run out of reserves"
I'm not sure it's a chicken and egg scenario. It's just a pricing issue. The price of the funding side has to be sufficient to get the right liability mix. That then informs the price on the lending side - which may end the lending cycle if that means you run out of willing borrowers.
Bearing in mind the width and depth of the discount window at the central bank.
There will always be sufficient reserves. The central bank has to make those available of the payment system won't clear.
"and the economy is already at capacity,"
The economy is rarely at capacity. Almost never in fact. There has been millions of people without work for decades.
So the discussions should mostly be about the common case - economy running cold. Not the exceptional one.
There's far too much focus on the exceptional case, and not enough on the common case IMV.
This is a brilliant research paper. This may be the much delayed break-thru of endogenous money concepts in mainstream economics. As the need of reserves is concerned I believe that interbank loans are a suitable method of generating such account money. To draw the line between possible and impossible it's correct to utilise double entry accounting as has been actual requirement for banks for centuries. My own text in https://olliranta.wordpress.com/endogenousmoney/ employs the same. It is somewhat simpler and a bit more concrete.
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