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The Crowding-out Effects of Bank Money Creation

28 Pages Posted: 4 Aug 2016 Last revised: 3 Oct 2017

Oz Shy

Independent

Rune Stenbacka

Hanken School of Economics

Date Written: October 2, 2017

Abstract

We construct an overlapping generations model, where the young generation has to allocate resources between real investment (deposits), acquisition of bank ownership and young-age consumption. At old age, consumers sell bank ownership to support consumption. We show that an increase in bank money creation stimulates bank profit and bank value, thereby raising the resources required for the young generation to acquire bank ownership. This causes a crowding-out effect on real investment, the magnitude of which is amplified by the money multiplier. Further, intensified deposit market competition reduces this crowding-out effect. Finally, we conduct a welfare analysis of bank money creation.

Keywords: investment crowding-out, bank money creation, money multiplier, size of the banking sector, deposit market competition

JEL Classification: E51, G21, G28

Suggested Citation

Shy, Oz and Stenbacka, Rune, The Crowding-out Effects of Bank Money Creation (October 2, 2017). Available at SSRN: https://ssrn.com/abstract=2818430 or http://dx.doi.org/10.2139/ssrn.2818430

Oz Shy (Contact Author)

Independent ( email )

No Address Available

Rune Stenbacka

Hanken School of Economics ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland
+35 89 4313 3433 (Phone)
+35 89 4313 3382 (Fax)

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