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

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  • Wenli Cheng

    (Department of Economics, Monash University)

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.

Suggested Citation

  • Wenli Cheng, 2024. "Real Savings, Entrepreneurship and Finance: A Monetary Model of Economic Growth," Monash Economics Working Papers 2024-14, Monash University, Department of Economics.
    • Handle: RePEc:mos:moswps:2024-14
    as

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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    credit creation; finance; entrepreneurship; real savings; economic growth;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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