by Summary:
Some serious economics here, which is about how priater bank created money does affect the economy. Some neoclassical economists are developing models that show this, although this is within their paradigm, but this it is a start, says Steve Keen. Now, after the Bank of England paper, Neoclassical economists are trying to work out the importance of credit in macroeconomics, using their conventional tools. I'm glad they're doing it, but I wish they'd also question whether their tools played any role in them not anticipating the crisis of 2007. Maybe different tools be better, and maybe the results they get be a product of the tools themselves, and not the real-world phenomena they're attempting to understand using them? Secondly, David didn't cite Michael Kumhof's work—probably because he
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Some serious economics here, which is about how priater bank created money does affect the economy. Some neoclassical economists are developing models that show this, although this is within their paradigm, but this it is a start, says Steve Keen.Some serious economics here, which is about how priater bank created money does affect the economy. Some neoclassical economists are developing models that show this, although this is within their paradigm, but this it is a start, says Steve Keen. Now, after the Bank of England paper, Neoclassical economists are trying to work out the importance of credit in macroeconomics, using their conventional tools. I'm glad they're doing it, but I wish they'd also question whether their tools played any role in them not anticipating the crisis of 2007. Maybe different tools be better, and maybe the results they get be a product of the tools themselves, and not the real-world phenomena they're attempting to understand using them? Secondly, David didn't cite Michael Kumhof's work—probably because he
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Mike Norman considers the following as important:
This could be interesting, too:
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Now, after the Bank of England paper, Neoclassical economists are trying to work out the importance of credit in macroeconomics, using their conventional tools. I'm glad they're doing it, but I wish they'd also question whether their tools played any role in them not anticipating the crisis of 2007. Maybe different tools be better, and maybe the results they get be a product of the tools themselves, and not the real-world phenomena they're attempting to understand using them?
Secondly, David didn't cite Michael Kumhof's work—probably because he wasn't aware of it (I've let him know). Michael Kumhof is a Senior Research Advisor to the Bank of England, and previously he was Deputy Division Chief of the Economic Modelling Division of the IMF.
Michael is a first-rate DSGE model builder, who also knew that banks create money long before that Bank of England paper came out, because he was a banker before he became an academic, and he understood what he did then (this is not something that can be said of many bankers). Michael also finds, in contrast to David, that bank creation of money results in a very different macroeconomy to one in which banks are just intermediaries. Michael's paper "Banks are not intermediaries of loanable funds - and why this matters" is the only Neoclassical paper to date to argue that the fact that banks create money does indeed matter in macroeconomics.
In the context of this debate, Michael's work is more significant than mine, because his work shows, using a Neoclassical methodology, that bank-created-money matters a great deal. So David's draft paper, which shows that it doesn't matter all that much, may say more about the techniques David employed (and the assumptions he made), rather than the issue itself.
Thirdly, while David's characterisation of the heterodox view is pretty accurate, there is one error when he states that "Banks do not in fact lend reserves–they lend their deposit liabilities (which are incidentally made redeemable for cash)". The first half of that sentence is correct; the latter is a statement of Loanable Funds, not the Bank created money approach. A better statement would be that:
"Banks do not in fact lend reserves–their lending creates their deposit liabilities (which are incidentally made redeemable for cash)".
Fourthly, my modelling of money has moved on since the paper that David cites, which pre-dates my debate with Krugman ( you can find a good overview of that debate, with links to the papers, on the Unlearning Economics blog at The Keen/Krugman Debate: A Summary). In particular, after that rather acrimonious exchange, I realised that the best way to show why the bank creation of money matters was to build a model of Loanable Funds which can be quickly converted into a model of Bank Created Money. In the former, not amazingly, bank lending has little macroeconomic impact. In the latter, its impact is huge.
My results are consistent with Kumhof's using a DSGE framework, but contrast with both David's, and also Faure and Gersbach's "Loanable funds vs money creation in banking: A benchmark result" where they both conclude that Loanable Funds versus Bank Money Creation is no big deal.
Not coincidentally, both David and Faure and Gersbach use the very peculiar (in both senses of the word) "Overlapping Generations" (OLG) approach. They also make assumptions that pretty much guarantee their conclusions, as David admits early on in his paper: