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Loanable funds versus money creation in banking: a benchmark result

Author

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  • Salomon Faure

    (Research at ETH Zurich)

  • Hans Gersbach

    (Research at ETH Zurich and CEPR)

Abstract

We establish a benchmark result for the relationship between the loanable-funds and the money-creation approach to banking. In particular, we show that both processes yield the same allocations when there is no uncertainty. In such cases, using the much simpler loanable-funds approach as a shortcut does not imply any loss of generality. When there is aggregate risk with complete contracts and complete markets, we indicate that a restricted equivalence result holds.

Suggested Citation

  • Salomon Faure & Hans Gersbach, 2022. "Loanable funds versus money creation in banking: a benchmark result," Journal of Economics, Springer, vol. 135(2), pages 107-149, March.
    • Handle: RePEc:kap:jeczfn:v:135:y:2022:i:2:d:10.1007_s00712-021-00747-7
    DOI: 10.1007/s00712-021-00747-7
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    References listed on IDEAS

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    Cited by:

    1. Gersbach, Hans & Zelzner, Sebastian, 2022. "Why Bank Money Creation?," CEPR Discussion Papers 17753, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Money creation; Bank deposits; Capital regulation; Monetary policy; Loanable funds;
    All these keywords.

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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