Real Savings, Entrepreneurship and Finance: A Monetary Model of Economic Growth

Wenli Cheng

No 2024-14, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: This paper presents a monetary model of economic growth that brings together 3 main growth drivers: real savings, entrepreneurship and finance. In addition to the familiar result that real savings and entrepreneurship are critical to capital formation and technology implementation, the model demonstrates how the quintessential bank – by issuing loans, taking deposits and providing payment services – plays a pivotal role in the sustainment and the growth of an economy. In particular, the bank creates purchasing power through loan issuance, which enables the entrepreneur to form capital and adopt new technologies. The bank also pays deposit interests to encourage real savings and provides payment services to facilitate monetary transactions. The model shows that following the adoption of new technologies, there is a discontinuous jump in economic output. Numerical simulations suggest that the economy will continue to grow for some time and will eventually reach a steady state. Sustained growth over the long term requires continued development and adoption of ever better technologies.

Keywords: credit creation; finance; entrepreneurship; real savings; economic growth (search for similar items in EconPapers)
JEL-codes: D90 G21 O40 (search for similar items in EconPapers)
Date: 2024-09
New Economics Papers: this item is included in nep-ent and nep-fdg
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