Banks are not intermediaries of loanable funds

In the intermediation of loanable funds model of banking, banks accept deposits of pre-existing real resources from savers and then lend them to borrowers. In the real world, banks provide financing through money creation. That is they create deposits of new money through lending, and in doing so are mainly constrained by profitability and solvency considerations. Michael Kumhof contrasts simple intermediation and financing models of banking. Compared to otherwise identical intermediation models, and following identical shocks, financing models predict changes in bank lending that are far larger, happen much faster, and have much greater effects on the real economy. Michael Kumhof is Senior Research Advisor in the Research Hub. He is responsible for co-leading this new unit, and for helping to formulate and carry out key parts of its research agenda. His previous position was Deputy Division Chief, Economic Modelling Division, IMF, where his responsibilities included the development of the IMF’s global DSGE simulation model. His main research interests are the quantitative evaluation of monetary reform proposals, modelling the role of banks in the macro-economy, the role of economic inequality in causing imbalances and crises, and the macroeconomic effects of fossil fuel depletion. Michael taught economics at Stanford University from 1998 to 2004. He worked in corporate banking for Barclays Bank from 1988 to 1993. His work has been published by AER, JME, AEJ Macro, JIE, JEDC, JMCB, EER, and Journal of Macroeconomics, among others.

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