Banks Money Creation and the Transmission Mechanism of Shocks (in Persian)

Mohammadreshad Esfahani (), Amineh Mahmoudzadeh and Seyyed Ali Madanizadeh ()
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Mohammadreshad Esfahani: Faculty of Management and Economics, Sharif University of Technology, Tehran, Iran
Seyyed Ali Madanizadeh: Department of Economics, Faculty of Management and Economics, Sharif University of Technology, Tehran, Iran

The Journal of Planning and Budgeting (٠صلنامه برنامه ریزی و بودجه), 2023, vol. 28, issue 2, 3-44

Abstract: This paper investigates the implications of bank money creation by developing a New Keynesian model that incorporates price rigidity and financial frictions but without real rigidities. Banks play a dual role as intermediaries of loanable funds and creators of credit. Their unique ability to create credit stems from the acceptance of their liabilities as a medium of exchange by economic agents. While the microeconomics of banking literature has addressed this function as liquidity transformation, there is a lack of macro-level analysis on this topic. We compare our baseline model with two alternative models: one featuring banks solely as intermediaries of loanable funds and another based on deposit multiplier models. Our model demonstrates that when banks have access to investment deposits held by households, their money-creation power predominantly affects nominal variables in the economy.

Keywords: Money Creation; Transmission Mechanism; Credit Creation; Money Multiplier; Financial Intermediation. (search for similar items in EconPapers)
JEL-codes: E41 E44 E51 E52 G21 (search for similar items in EconPapers)
Date: 2023
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