Banking theories and macroeconomics

Abstract

The recently expanding macro-financial literature is facing the analytical challenge to analyse the working of modern market economies without losing touch with the factual role played by financial institutions. Mainstream macroeconomic models that embody a financial sector are characterized by the understanding of banks as intermediaries of loanable funds (deposit-taking paving the way for loan extension). This approach to banking is increasingly considered as a major flaw in macroeconomic thinking. The Post-Keynesian theory of inside money creation is gaining momentum even in mainstream circles. The present article highlights the key differences of these alternative doctrines from a money supply perspective, so to stress the key aspects of the monetary dimension of the so-called financial cycle and the fact that monetary policy alone has no impact on aggregate expenditure.

The art of leverage: a study of bank power, money-making and debt finance

“…The supply of 'loanable funds' can be elastically expanded thanks to the 'fractional reserve mechanism' and the 'money multiplier' (for a critique, cf. Sgambati 2016;Bianco and Sardoni 2017). However, as in a peculiar conservation law of finance, through banking no money is truly created or destroyed: instead, all money is transformed from one's saving (credit) into another's investment (debt), and banks only serve the function of equilibrating the supply and demand for monetary funds and clearing the market gap between borrowers and savers -the principal agents of finance.…”

The Godley-Tobin Memorial Lecture

“…These papers have criticized the textbook money-multiplier story as well as the loanable-funds approach, providing support to the long-held Post-Keynesian credit-creating view of banking which can also be found in Godley's works. Different names have been proposed for this third view of banks: credit-creation theory (Werner 2016); endogenous-money theory (Ábel et al 2016); financing through moneycreation theory (Jakab and Kumhof 2015;; originate inside money theory (Bianco and Sardoni 2018); bank-originated money and debt theory (Keen 2020).…”

Untitled

“…These papers have criticized the textbook money-multiplier story as well as the loanable-funds approach, providing support to the long-held Post-Keynesian credit-creating view of banking which can also be found in Godley's works. Different names have been proposed for this third view of banks: credit-creation theory (Werner 2016); endogenous-money theory (Ábel et al 2016); financing through moneycreation theory (Jakab and Kumhof 2015;; originate inside money theory (Bianco and Sardoni 2018); bank-originated money and debt theory (Keen 2020).…”