ABSTRACTThe Levy Economics Institute Of Bard College
This paper presents a stock-flow consistent model+ of full-reserve banking. It is found that in a steady state, full-reserve banking can accommodate a zero-growth economy and provide both full employment and zero inflation. Furthermore, a money creation experiment is conducted with the model. An increase in central bank reserves translates into a two-thirds increase in demand deposits. Money creation through government spending leads to a temporary increase in real GDP and inflation. Surprisingly, it also leads to a permanent reduction in consolidated government debt. The claims that full-reserve banking would precipitate a credit crunch or excessively volatile interest rates are found to be baseless.
Working Paper No. 851
Money Creation under Full-reserve Banking: A Stock-flow Consistent Model
Patrizio Lainà, University of Helsinki
October 2015
Patrizio Lainà, University of Helsinki
October 2015
4 comments:
No link.
And of course it will do, within the base assumptions of the model, because full reserve is operationally exactly the same as the current insured system. There are no additional effective control points in the structure.
No doubt the paper fails to run the same model with an insured accounting structure, but the same level of government spending.
The 'magic' in full reserve, if it is anything, is that increases government spending to offset the reduction in bank lending caused by any price shift in liabilities.
Which again is exactly the same as an insured model - because they are operationally identical.
It's not the operations that are in question. It's the politics hidden in the propaganda - the destruction of free banking, the excessive centralisation in the hands of a cabal of 'Wise Monkeys', the failure to contain ponzi financing inherent in any bank system that tries to control on the liability side.
All of which is much more difficult to model in a spreadsheet.
"Money creation through government spending leads to a temporary increase in real GDP and inflation."
I could understand the increase in GDP but would like to see the math behind the claim that it increases 'inflation'...
I fixed the link in the post. Here it is.
http://www.levyinstitute.org/pubs/wp_851.pdf
if it can increase GDP it can increase inflation. the key word being can, but not necessarily if there is an output gap, it's not a straightforward causation, depends on context.
most inflation nowadays comes from commodity price fluctuation and raw materials, so if there is not a substantial change on that because increased demand or speculation inflation won't happen. wage inflation hasn't happened in forever...
also the prices increase often if the government wants to, stop bidding up and they won't increase (or not so much).
Economists have to stop thinking about the inflation bogeyman as something that is out of our control, because most of the time is not if we want to contain it.
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