Research in progress

Money-creating banks and the market price of time (updated draft coming soon) 

Abstract: This paper demonstrates the importance of commercial banks’ creation of money for key macroeconomic outcomes such as real investment, aggregate output and credit. Using a cash-in-advance framework extended to allow for privately issued money, I show that commercial banks’ creation of demand-deposits which thereafter circulate as a medium of exchange can result in a persistently lower real risk-free interest rate---i.e., cheaper credit. The lower real interest rate changes firms’ real investment and hence aggregate output, potentially leading to Pareto inferior equilibria. Moreover, the downward pressure on the price of credit leads to a ”credit hungry” society characterised by high levels of indebtedness and low levels of bank capital. Importantly, this credit channel can operate even without changes to the stock of commercial-bank-created money. Rather, it stems from money-creating banks’ ability to issue more credit, and them finding it profitable to do so at lower interest rates, compared to banks limited to intermediation of existing money units only. While other agents' willingness to hold the privately issued money is key, I show that this in itself provides surprisingly weak limits on the quantity of bank credit. 

Money-creating banks and the effect of monetary policy

~ Awarded research grant by the Royal Swedish Academy of Sciences ~

Abstract: This paper shows that the presence of money-creating commercial banks can change both the magnitude and direction of monetary policy’s impact on key economic variables such as employment and aggregate output. Commercial banks’ creation of money effectively acts as endogenously created, long-run price stickiness due to its downward pressure on the nominal interest rate, which in turn makes this nominal rate unable to adjust in accordance with the inflation rate. Consequently, the presence of money-creating commercial banks can transform the steady-state real interest rate from being exclusively determined by agents’ rate of time preference to being influenced by the constant growth rate of the stock of central bank money. This gives central banks a more persistent and powerful role in influencing real interest rates than hitherto acknowledged.

Connectedness to money inflow and the structure of production

Abstract: I develop a network model of production and show that the size of a given sector is influenced by how close this sector is to the source of money inflow, where distance is measured in number of transactions from the sector into which the newly created money is initially injected. That is, some sectors can become ”artificially large”—in terms of input into and output from—due to their closeness to the source of money inflow. This holds even when prices are perfectly flexible and all agents are perfectly informed on current and future changes in the money supply, including their source. Examples of sectors typically close to the source of money inflow are financial markets and the housing market.