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A simple theory of banking and the relationship between commercial banks and the central bank

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  • Eric Kam
  • John Smithin

Abstract

This note provides an explanation of the relationship between the nominal and real lending rates of the commercial banks and central bank policy rates. It suggests that "a real interest rate rule" on the part of the central bank would influence the real lending rate perceived by commercial banks and their borrowers, and could affect the real economy via this route. There is a negative theoretical relationship between the inflation adjusted "real" lending rate and the rate of inflation itself.

Suggested Citation

  • Eric Kam & John Smithin, 2012. "A simple theory of banking and the relationship between commercial banks and the central bank," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 34(3), pages 547-552.
    • Handle: RePEc:mes:postke:v:34:y:2012:i:3:p:547-552
    DOI: 10.2753/PKE0160-3477340308
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    Cited by:

    1. Konstantinos Loizos, 2020. "The interbank market, Keynes’s degree of confidence and the link between banks’ liquidity and solvency," Working Papers PKWP2017, Post Keynesian Economics Society (PKES).
    2. Eric Kam & John Smithin & Aqeela Tabassum, 2018. "The Long-Run Non-Neutrality of Monetary Policy: A General Statement in a Dynamic General Equilibrium Model," Working Papers 074, Toronto Metropolitan University, Department of Economics.

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