Banks are Not Intermediaries of Loanable Funds — Facts, Theory and Evidence

Jakab, Zoltán; Kumhof, Michael

doi:10.2139/ssrn.3274706

Cited by 46 publications

(32 citation statements)

References 94 publications

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“…5 include a financial sector modeled the banking sector in a way that did not reflect the crucial aspects of a banking sector in practice. These issues have been raised in BIS (2011) and Jakab and Kumhof (2019), and are beyond the scope of this paper. 4 See Caverzasi and Godin (2014), , and Nikiforos and Zezza (2017) for comprehensive surveys on the SFC approach to modeling.…”

Section: Tradition Of Macro Modeling In Denmarkmentioning

confidence: 99%

An Empirical Stock-Flow Consistent Macroeconomic Model for Denmark

Byrialsen

Raza

2020

SSRN Journal

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This paper emphasizes the need for understanding the interdependencies between the real and financial sides of the economy in macroeconomic models. While the real side of the economy is generally well explained in macroeconomic models, the financial side and its interaction with the real economy remains poorly understood. This paper makes an attempt to model the interdependencies between the real and financial sides of the economy in Denmark while adopting a stock-flow consistent approach. The model is estimated using Danish data for the period 1995-2016. The model is simulated to create a baseline scenario for the period 2017-30, against which the effects of two standard shocks (fiscal shocks and interest rate shocks) are analyzed. Overall, our model is able to replicate the stylized facts, as will be discussed. While the model structure is fairly simple due to different constraints, the use of the stockflow approach makes it possible to explain several transmission mechanisms through which real economic behavior can affect the balance sheets, and at the same time capture the feedback effects from the balance sheets to the real economy. Finally, we discuss certain limitations of our model.

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Section: Tradition Of Macro Modeling In Denmarkmentioning

confidence: 99%

An Empirical Stock-Flow Consistent Macroeconomic Model for Denmark

Byrialsen

Raza

2020

SSRN Journal

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“…In the recent academic literature the same notion has been formalized by Goodfriend and McCallum (2007), Benes and Kumhof (2012), Kumhof (2015, 2019), Faure and Gersbach (2017) and Kumhof and Wang (2019). Jakab and Kumhof (2019) refer to this as the financing through money creation model, or for brevity the financing model, of banking.…”

Section: Introductionmentioning

confidence: 95%

“…There are several differences between this literature and our paper. Perhaps most importantly, we model banks as creators of deposits of digital currency, created through Friedman's (1971) bookkeeper's pen as in Jakab and Kumhof (2019) and Kumhof and Wang (2019), rather than as intermediaries of deposits of physical savings as in this literature. The willingness of households to hold deposits is therefore not determined by their preferences over net physical flows of resources, but rather by their preferences over gross financial stocks of asset and liability ledger entries, where the asset ledger entries serve as a means of payment for physical resources but are not themselves accumulated as physical resources.…”

Section: Related Literaturementioning

confidence: 99%

“…This is an explicit ingredient of our model. Second, deposits in either currency are predominantly created (and destroyed) through the creation (and repayment) of loans in that currency, and also, but to a much lesser extent (see Jakab and Kumhof (2019)), through the purchase (and sale) of securities. This means that not only the demand for deposits by non-banks, in other words their willingness to hold deposits in different currencies, but also the supply of deposits by banks, in other words their willingness to create deposits in different currencies by creating the necessary loans, becomes an important source of shocks, and this also is an explicit ingredient of our model.…”

Section: Introductionmentioning

confidence: 99%

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Towards a New Monetary Theory of Exchange Rate Determination

et al. 2019

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We study exchange rate determination in a 2-country model where domestic banks create each economy's supply of domestic and foreign currency. The model combines the UIP-based and monetary theories of exchange rate determination, but the latter with a focus on private rather than public money creation. The model features an endogenous monetary spread or excess return in the UIP condition. This spread experiences sizeable changes when shocks affect the relative supplies (of bank loans) or demands (for bank deposits) of the two currencies. Under such shocks, monetary effects dominate traditional UIP effects in the determination of exchange rates and allocations, and this becomes stronger as domestic and foreign currencies become more imperfect substitutes. With these shocks, the model successfully addresses the UIP puzzle, and it is also consistent with the Meese-Rogoff and PPP puzzles.

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“…In this model, the granting of new loans represents the outcome of the simultaneous solution of banks' and households' optimization problems over gross financial asset and liability positions rather than, as in typical net flow models, their preferences over net physical flows such as consumption and labor supply. Similar to the closed-economy gross flow DSGE model of Jakab and Kumhof (2020), banks can therefore instantaneously increase loans in response to changes in preferences over gross positions, and this can be completely disconnected from the underlying physical resource flows and stocks of the economy. 5 Borio and Disyatat (2011) refer to this much greater elasticity of preferences over gross positions as the "excess elasticity" of the financial system.…”

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confidence: 99%

How Does International Capital Flow?

2020

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Understanding gross capital flows is increasingly viewed as crucial for both macroeconomic and financial stability policies, but theory is lagging behind many key policy debates. We fill this gap by developing a two-country DSGE model that tracks domestic and cross-border gross positions between banks and households, with explicit settlement of all transactions through banks. We formalise the conceptual distinction between cross-border saving and financing, which often move in opposite directions in response to shocks. This matters for at least four policy debates. First, current accounts are poor indicators of financial vulnerability, because in a crisis, creditors stop financing debt rather than current accounts, and because following a crisis, current accounts are not the primary channel through which balance sheets adjust. Second, we reinterpret the global saving glut hypothesis by arguing that US households do not finance current account deficits with foreigners' physical saving, but with digital purchasing power, created by banks that are more likely to be domestic than foreign. Third, Triffin's current account dilemma is not in fact a dilemma, because the creation of additional US dollars requires dollar credit creation by US and non-US banks rather than US current account deficits. Finally, we demonstrate that the observed high correlation of gross capital inflows and outflows is overwhelmingly an automatic consequence of double entry bookkeeping, rather than the result of two separate sets of economic decisions.

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Banks are Not Intermediaries of Loanable Funds — Facts, Theory and Evidence

Cited by 46 publications

References 94 publications

An Empirical Stock-Flow Consistent Macroeconomic Model for Denmark

An Empirical Stock-Flow Consistent Macroeconomic Model for Denmark

Towards a New Monetary Theory of Exchange Rate Determination

How Does International Capital Flow?

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