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Banks Money Creation and the Transmission Mechanism of Shocks

Esfahani, Mohammad Reshad | 2021

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  1. Type of Document: M.Sc. Thesis
  2. Language: Farsi
  3. Document No: 54536 (44)
  4. University: Sharif University of Technology
  5. Department: Management and Economics
  6. Advisor(s): Madanizadeh, Ali; Mahmoodzadeh, Amineh
  7. Abstract:
  8. Banks are not only money brokers but also money creators. The ability of a bank to create money is due to its unique feature in issuing debts (deposits) that are accepted as a medium of exchange by economic agents. Although this bank function has been discussed under the "liquidity transformation" heading under the micro-banking literature, it has been less discussed in macro literature. In this study, we want to examine the consequences of the bank's liquidity transformation function by developing a New-Keynesian model in which banks can finance the economy by voluntarily expanding their balance sheet. To identify the mechanisms that the money creator bank creates in the model, we have compared the results with two other models, in which the bank is the only intermediary of funds and cannot finance the economy balance sheet by voluntary expansion. One of these models represents financial intermediary models, and the other represents money multiplier models, which are among the older generations of bank modeling in macroeconomic models. Our results show that the bank's ability to create money in the presence of financial frictions creates mechanisms that affect the dynamics of macroeconomic variables when shocks hit. The most important findings of this study are: a) When the bank can create money, Shocks are more durable in the economy. b) The presence of the money-creating bank in the model causes more drastic changes in investment and, instead, milder changes in consumption when shocks occur. c) Compared to the productivity shock, the consequences of the presence of the money-creating bank in the model, when the monetary policy shock is hit, show its effect on the behavior of macro variables more strongly. d) By comparing the two policy frameworks of reserves control and inflation targeting in the model of the money-creating bank, it is observed that inflation targeting policy leads to more stability in production
  9. Keywords:
  10. Money Creation ; Credit Creation ; Financial Intermediation ; Diffusion Coefficient ; Transmission Mechanism

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