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The role of fractional-reserve banking in amplifying credit booms: Evidence from panel data

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  • Maciej Albinowski

    (Warsaw School of Economics)

Abstract

I use panel data on 20 countries to analyze the links between savings (defined as time deposits and savings accounts) and credit extended by banks. Credit growth is not related to prior changes in savings, at least not in the short run. This result indicates that the intuition behind the loanable funds theory does not work well in explaining macroeconomic dynamics. I also find that the share of savings in total deposits decreases during credit booms. The existence of such an effect is predicted by the Austrian business cycle theory. Based on the above results, I infer that an important disadvantage of fractional-reserve banking is a tendency for the market interest rate to diverge from the natural interest rate.

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  • Maciej Albinowski, 2022. "The role of fractional-reserve banking in amplifying credit booms: Evidence from panel data," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 35(1), pages 63-88, March.
    • Handle: RePEc:kap:revaec:v:35:y:2022:i:1:d:10.1007_s11138-019-00492-7
    DOI: 10.1007/s11138-019-00492-7
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    2. Xinping Zhang & Yimeng Zhang & Yunchan Zhu, 2021. "COVID-19 Pandemic, Sustainability of Macroeconomy, and Choice of Monetary Policy Targets: A NK-DSGE Analysis Based on China," Sustainability, MDPI, vol. 13(6), pages 1-20, March.

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    More about this item

    Keywords

    Loanable funds; Deposits; Credit booms; Fractional-reserve banking;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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