Banks and Economic Growth: The General Theory in a Basic Disequilibrium Model with Five Rationing Regimes

Date

2021-12-05

Advisors

Journal Title

Journal ISSN

ISSN

2308-944X

Volume Title

Publisher

Review of Business and Economics Studies

Type

Article

Peer reviewed

Yes

Abstract

In this paper, an inductive research methodology and the principle of parsimony are applied to reconsider a central issue in economics and macro-finance, namely the determinants of economic growth and the role of the financial sector. A simple framework is derived, characterised by information imperfections and the absence of market clearing. The literature on rationing has identified the need to consider differing rationing regimes but has not included a banking sector. Such a set-up is presented in this paper, which identifies the link between credit and economic growth under differing rationing regimes, with varying consequences for inflation. The familiar case of money creation resulting in inflation features as a special case within the general framework. Others are the possibility of asset price bubbles and collapses, non-inflationary growth despite full employment, and instability in banking systems. The model is consistent with empirical evidence that has been difficult to reconcile with conventional equilibrium models. It is found that within this simple rationing framework, banks, left to their own devices, do not necessarily deliver stable, non-inflationary growth, and there is no reason to expect their behaviour to optimise social welfare. Some implications for research and policy are discussed.

Description

open access article

Keywords

banking, credit, development, growth, equation of exchange, finance and growth, growth accounting, quantity equation

Citation

Werner, Richard A. (2021) Banks and Economic Growth: The General Theory in a Basic Disequilibrium Model with Five Rationing Regimes. Review of Business and Economics Studies. 9 (4), pp. 9-22

Rights

Research Institute

Centre for Research in Accountability, Governance and Sustainability (CRAGS)