Credit Creation: The “Good”, the “Bad” and the “Ugly”

Wenli Cheng ()
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Wenli Cheng: Monash University

No 2025-20, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: This paper develops a stock-flow consistent model to study the effects of three types of bank credit: credit for production, credit for consumption, and credit for asset speculation.The main findings are: (1) Credit for production (the “good”) enables capital formation and the adoption of more productive technologies; (2) Credit for consumption (the “bad”) diverts some real savings from capital formation to consumption, resulting in lower total output and less individual wealth; and (3) Credit for speculation (the “ugly”) funds real wealth transfers that are unrelated to wealth creation. It can result in higher prices in the goods market, which harms all consumers including those who do not participate in asset speculation.

Keywords: stock-flow-consistent model; credit creation; production loans; consumption loans; loans for asset speculation (search for similar items in EconPapers)
JEL-codes: E12 G21 (search for similar items in EconPapers)
Date: 2025-11
New Economics Papers: this item is included in nep-fdg and nep-pke
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