A Descriptive Model of Banking and Aggregate Demand

Jochen O. Mierau*, Mark Mink

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

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Abstract

We integrate a banking sector into an accessible macroeconomic framework, which then provides new insights on developments around the Global Financial Crisis. The analysis shows that growth of banking sector money supply may help explain the secular decline in long-term interest rates before the crisis. A new bank funding channel of monetary transmission clarifies why increases in central bank policy rates could not reverse this trend. Our analysis highlights the distinction between the zero lower bound and the liquidity trap, and shows that bank recapitalizations can be more effective than fiscal expansions in restoring aggregate demand after a banking crisis.

Original languageEnglish
Pages (from-to)207-237
Number of pages31
JournalEconomist-Netherlands
Volume166
Issue number2
DOIs
Publication statusPublished - Jun-2018

Keywords

  • Aggregate demand
  • Banking
  • Monetary transmission
  • Global financial crisis
  • MONETARY-POLICY
  • LIQUIDITY TRAP
  • MACROECONOMICS
  • CREDIT
  • TRANSMISSION
  • RETURN
  • KEYNES
  • RATES
  • MONEY

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