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The Real Effect of Banks’ Money Creation Ability in a New Keynesian Framework

Darzi Larijani, Samyar | 2020

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  1. Type of Document: M.Sc. Thesis
  2. Language: Farsi
  3. Document No: 53627 (44)
  4. University: Sharif University of Technology
  5. Department: Management and Economics
  6. Advisor(s): Madanizadeh, Ali; Mahmoodzadeh, Amineh
  7. Abstract:
  8. In much of the financial economics literature, banks are modeled as financial intermediaries that transfer household deposits to loan applicants. In these models, deposits are obtained from the accumulation of real amounts (household savings). In addition to this, another approach describes banks not as intermediaries of loanable funds, but as money-creators who do not need to accumulate deposit resources to lend. In this study, by modeling the money-creation behavior of the banking network, we try to answer the question that if the bank can create credit and purchasing power for the firm based on its future income, how will the general variables of the economy, including consumption and investment, will behave. Also, what will be the difference compared to the model where banks are only financial intermediaries. To this end, we model an economy based on a five-part model written as an infinite-period general equilibrium. Households, the final goods producer, the capital goods producer and the banking network, decide in order to maximize their welfare and profits, and the central bank conducts monetary policy. Another important point is the existence of price stickiness and monetary policies of the central bank in the model, which can be quite effective on the mechanism of monetary policy transmission and, consequently, on the behavior of real variables in the economy.Simulating the economy in response to the temporary productivity shock in the presence of price stickiness and in each of the monetary policies of the central bank shows that although in the two frameworks of money creation and financial intermediation, the real variables of the economy behave similarly, but they have different speed of convergence to steady states. Meanwhile, in the context of money-creation and comparing the results of simulating the transition of economy for flexible and sticky prices, it is observed that if the central bank's policy is to control reserves, stickiness reduces the impact of shocks on variables and thus prevents large fluctuations in the economy. Also, if the central bank's policy is to target inflation, according to the feedback effect of the central bank's policy, inflation is well controlled and the presence or absence of stickiness has little effect on the behavior of variables. Also, the results of this study show that in the context of money-creation, the behavior of the banking network under different policy rules of the central bank has significant differences, especially in the bank balance sheet variables and interest rates. Meanwhile, according to the analysis of the steady-state, reducing the legal reserve rate of investment deposits and increasing the legal reserve rate of demand deposits, will cause the growth of the economy
  9. Keywords:
  10. Fractional Reserve ; Price Stickiness ; Inflation Targeting ; Monetary Policy ; Bank Financial Intermediary Bank ; Money Creator Bank

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