Journal Article

No. 2013-32 | July 29, 2013
Money Creation and Financial Instability: An Agent-Based Credit Network Approach PDF Icon

Abstract

The authors develop a simple agent-based and stock flow consistent model of a monetary economy. Their model is well suited to explain money creation along the lines of mainstream theory. Additionally it uncovers a potential instability that follows from a maturity mismatch of assets and liabilities. The authors analyze the impact of interbank lending on the stability of the financial sector and find that an interbank market stabilizes the economy during normal times but amplifies systemic instability, contagion and bankruptcy cascades during crises. But even with no interbank market, indirect contagion can lead to bankruptcy cascades. The authors also find that the existence of large banks threatens stability and that regulatory policy should target large banks more strictly than small.

JEL Classification

C63 E42 E51 G01

Citation

Matthias Lengnick, Sebastian Krug, and Hans-Werner Wohltmann (2013). Money Creation and Financial Instability: An Agent-Based Credit Network Approach. Economics: The Open-Access, Open-Assessment E-Journal, Vol. 7, 2013-32. http://dx.doi.org/10.5018/economics-ejournal.ja.2013-32

Assessment

Downloads: 1335 (Journalarticle: 736, Discussionpaper: 599)
external link Search this article at Google Scholar



Comments and Questions