Working Paper

Reconciling Orthodox and Heterodox Views on Money and Banking


Abstract: A wide range of heterodox theories claim that banks are special because they create money in the act of lending. Put another way, banks can create the funding they need ex nihilo, whereas all other agencies must first acquire the funding they need from other parties. Mainstream economic theory largely agrees with this assessment, but questions its theoretical and empirical relevance, preferring to view banks as one of many potentially important actors in the financial market. In this paper, I develop a formal economic model in an attempt to make these ideas precise. The model lends some support to both views on banking.

Keywords: Heterodox view; Money; Banking;

JEL Classification: E4; E5;

https://doi.org/10.20955/wp.2018.027

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2018-10-09

Number: 2018-27