Money Creation under Full-reserve Banking: A Stock-flow Consistent Model

Patrizio Laina

Economics Working Paper Archive from Levy Economics Institute

Abstract: 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.

Keywords: Full-reserve Banking; Stock-flow Consistency; Money Creation; Banking System (search for similar items in EconPapers)
JEL-codes: E27 E42 E51 (search for similar items in EconPapers)
Date: 2015-10
New Economics Papers: this item is included in nep-mac, nep-mon and nep-pke
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:lev:wrkpap:wp_851

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