Loanable Funds vs Money Creation in Banking: A Benchmark Result

Banks, money, and the zero lower bound on deposit rates

“…Specifically, banks initially create deposits through loans for a single agent that requires deposits for real economic transactions, and thereafter provide a payment system whereby these deposits continue to circulate and are required for all economic transactions. Our paper is therefore closely related to a recent macroeconomic literature that models deposit creation through bank loans in general equilibrium, 7 including Goodfriend and McCallum (2007), Kumhof (2015, 2020), Faure and Gersbach (2017) and Clancy and Merola 2017). This literature has a long pedigree in the Keynesian and Post-Keynesian traditions, which are discussed in Section 2.3.…”

“…Third, loans are produced using a Cobb-Douglas production function in capital (as collateral, together with bonds) and labor, which gives impulse responses a strong real flavor, akin to a manufacturing firm, that is absent in our model. Faure and Gersbach (2017), in a 2-period model, show that in the absence of uncertainty financing models imply identical allocations to banking models without the financing channel. This is related to the result in Kumhof (2015, 2020) that the deterministic steady states of these two model classes are identical.…”

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

“…The paper does not emphasize the major differences between this approach and the ILF model, which would however be muted in their model because of the assumption of a real loan production function that depends on collateral values and labor effort. Faure and Gersbach (2017), in a 2-period model, show that in the absence of uncertainty SAV and FMC models imply identical allocations. This is related to the result in this paper that the deterministic steady states of the two model classes are identical.…”

“…The first mechanism is the creation or destruction of deposits through loans (FMC), the second is the acquisition, sale or revaluation of existing physical assets or of securities that represent claims to such assets (DFS or VAL, here combined and denoted by SEC), and the third is the saving of physical resources (SAV). Other than Benes and Kumhof (2012), Jakab and Kumhof (2015)) and the related work at central banks cited in Section 1, to our knowledge only three papers, Goodfriend and McCallum (2007), Faure and Gersbach (2017) and Clancy and Merola (2017), are based exclusively on the FMC mechanism. In Goodfriend and McCallum (2007) loans create deposits that enter a cash-in-advance constraint different reasons, under quantitative easing at the ZLB.…”

Bankruptcy Codes and Risk Sharing of Currency Unions

“…Following the 2007-2009 Global Financial Crisis, there has been a revival of inside money modelling due to the renewed interest in banks' balance sheet transformation for credit extension and liquidity creation and the associated macro-financial outcomes. Recent advances include and are not limited to Bigio and Weill (2016), Brunnermeier and Sannikov (2016) , Faure and Gersbach (2017), Donaldson et al (2018), Bianchi and Bigio (2020), Piazzesi andSchneider (2018), McMahon et al (2018), Kiyotaki and Moore (2018a), Kiyotaki and Moore (2018b), Wang (2019), and Kumhof and Wang (2020). Sharing a similar spirit, liquidity creation is also much emphasised in the literature on banking (see Gorton and Pennacchi 1990;Diamond and Rajan 2001;Stein 2012;Hart and Zingales 2014;DeAngelo and Stulz 2015) and safe assets (see J Caballero and Farhi 2017).…”