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Credit and money creation from the integrated accounts perspective

Tomas Ramanauskas (), Skirmante Matkenaite () and Virgilijus Rutkauskas ()
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Tomas Ramanauskas: Bank of Lithuania
Skirmante Matkenaite: Bank of Lithuania
Virgilijus Rutkauskas: Bank of Lithuania

No 5, Bank of Lithuania Discussion Paper Series from Bank of Lithuania

Abstract: In this paper we apply the analytical integrated accounts framework to conduct a conceptual analysis of essential macrofinancial linkages. In particular, we analyse the macroeconomic mechanism of the creation of purchasing power through bank credit, explore the partial self-financing property of bank credit and the links between bank credit and money creation, and discuss the role of debt accumulation as a powerful demand-side driver of growth. We argue that creation of money and purchasing power is an indispensable corollary of bank credit issuance. Contrary to conventional wisdom, credit is not predicated on existing savings. It directly adds to domestic demand, which translates into some combination of stronger domestic economic activity, stronger foreign economic activity or higher prices, with particular configuration depending on the structural features of the economy. However, credit-driven growth may result in a systemic over-reliance on continuous debt accumulation and poses the risk of deep structural imbalances and balance sheet recessions.

Keywords: bank lending; credit creation; money creation; national accounts; integrated accounts; macroeconomic and financial linkages (search for similar items in EconPapers)
JEL-codes: E51 E58 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2018-04-06
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