Against Savings: A Suggested Exposition of the Markets for Money and Credit

25 Pages Posted: 22 Aug 2017 Last revised: 6 Feb 2018

Cameron Harwick

George Mason University - Department of Economics

Date Written: February 5, 2018

Abstract

The notion of savings in economics has a variety of mutually incompatible meanings. This paper goes through various interpretations of the term and argues that, for the sake of clarity, it can and should be replaced with more precise terms. In order to show the significance of doing so, the paper then offers an “augmented” loanable funds model.

Unlike the standard model, which was developed in the context of unintermediated lending, our mode:

1) does not identify the supply of loanable funds with “savings”, and

2) explicitly connects the banking sector to the supply of money with something more theoretically robust than a simple money multiplier.

The resulting construction clarifies the relationship between the markets for money and credit, and is more faithful to the image of banks as creators of credit, while still retaining the pedagogical simplicity of the original loanable funds model.

Keywords: Macroeconomics, Saving, Banking, Loanable Funds, Pedagogy

JEL Classification: E21, E51, A22, B12, B22

Suggested Citation

Harwick, Cameron, Against Savings: A Suggested Exposition of the Markets for Money and Credit (February 5, 2018). Available at SSRN: https://ssrn.com/abstract=3021115 or http://dx.doi.org/10.2139/ssrn.3021115

Cameron Harwick (Contact Author)

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States

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