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A Descriptive Model of Banking and Aggregate Demand

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  • Jochen O. Mierau

    (University of Groningen)

  • Mark Mink

    (De Nederlandsche Bank (DNB))

Abstract

We integrate a banking sector into an accessible macroeconomic framework, which then provides new insights on developments around the Global Financial Crisis. The analysis shows that growth of banking sector money supply may help explain the secular decline in long-term interest rates before the crisis. A new bank funding channel of monetary transmission clarifies why increases in central bank policy rates could not reverse this trend. Our analysis highlights the distinction between the zero lower bound and the liquidity trap, and shows that bank recapitalizations can be more effective than fiscal expansions in restoring aggregate demand after a banking crisis.

Suggested Citation

  • Jochen O. Mierau & Mark Mink, 2018. "A Descriptive Model of Banking and Aggregate Demand," De Economist, Springer, vol. 166(2), pages 207-237, June.
    • Handle: RePEc:kap:decono:v:166:y:2018:i:2:d:10.1007_s10645-018-9320-4
    DOI: 10.1007/s10645-018-9320-4
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    2. Sebastiaan Pool, 2016. "Credit Defaults, Bank Lending and the Real Economy," DNB Working Papers 518, Netherlands Central Bank, Research Department.

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    More about this item

    Keywords

    Aggregate demand; Banking; Monetary transmission; Global financial crisis;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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