The role of fractional-reserve banking in amplifying credit booms: Evidence from panel data

Maciej Albinowski

The Review of Austrian Economics, 2022, vol. 35, issue 1, No 4, 63-88

Abstract: Abstract I use panel data on 20 countries to analyze the links between savings (defined as time deposits and savings accounts) and credit extended by banks. Credit growth is not related to prior changes in savings, at least not in the short run. This result indicates that the intuition behind the loanable funds theory does not work well in explaining macroeconomic dynamics. I also find that the share of savings in total deposits decreases during credit booms. The existence of such an effect is predicted by the Austrian business cycle theory. Based on the above results, I infer that an important disadvantage of fractional-reserve banking is a tendency for the market interest rate to diverge from the natural interest rate.

Keywords: Loanable funds; Deposits; Credit booms; Fractional-reserve banking; E51; E32; E41 (search for similar items in EconPapers)
Date: 2022
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Working Paper: The role of fractional-reserve banking in amplifying credit booms: evidence from panel data (2017)
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DOI: 10.1007/s11138-019-00492-7

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