28 Pages Posted: 4 Aug 2016 Last revised: 3 Oct 2017
Date Written: October 2, 2017
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
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