Working Paper: CEPR ID: DP13233
Authors: Frank Decker; Charles A. Goodhart
Abstract: This paper assesses the theory of credit mechanics within the context of the current money supply debate. Credit mechanics and related approaches were developed by a group of German monetary economists during the 1920s-1960s. Credit mechanics overcomes a one-sided, bank-centric view of money creation, which is often encountered in monetary theory. We show that the money supply is influenced by the interplay of loan creation and repayment rates; the relative share of credit volume neutral debtor-to-debtor and creditor-to-creditor payments; the availability of loan security; and the behavior of non-banks and non-borrowing bank creditors . With the standard textbook models of money creation now discredited, we argue that a more general approach to money supply theory involving credit mechanics needs to be established.
Keywords: credit creation; bank credit; money supply theory; credit mechanics; balances mechanics
JEL Codes: E40; E41; E50; E51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| loan creation (G51) | money supply (E51) |
| repayment rates (G51) | money supply (E51) |
| non-borrowing bank creditors (G21) | money supply (E51) |
| repayment behavior (G51) | money supply (E51) |