Models of Banking: Loanable Funds or Loans that Create Funds?

48 Pages Posted: 2 Aug 2014

See all articles by Zoltan Jakab

Zoltan Jakab

International Monetary Fund

Michael Kumhof

Bank of England

Date Written: July 31, 2014

Abstract

In the loanable funds model of banking, banks accept deposits of resources from savers and then lend them to borrowers. In the real world, banks provide financing, that is they create deposits of new money through lending, and in doing so are mainly constrained by expectations of profitability and solvency. This paper presents and contrasts simple loanable funds and financing models of banking. Compared to otherwise identical loanable funds models, and following identical shocks, financing models predict changes in bank lending that are far larger, happen much faster, and have much larger effects on the real economy.

Keywords: Bank lending, loanable funds, endogenous money, financial accelerator, DSGE, bank leverage, credit cycles, credit rationing, macroprudential policy

JEL Classification: E44, E51

Suggested Citation

Jakab, Zoltan and Kumhof, Michael, Models of Banking: Loanable Funds or Loans that Create Funds? (July 31, 2014). Available at SSRN: https://ssrn.com/abstract=2474759 or http://dx.doi.org/10.2139/ssrn.2474759

Zoltan Jakab

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Michael Kumhof (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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