Contributors: Morgan Ricks, Marc Lavoie, Robert Hockett, Saule Omarova, Michael Kumhof, Zoltan Jakab, Paul Tucker, Charles Kahn, Daniel Tarullo, Stephen Marglin, Howell Jackson and Christine Desan, Sannoy Das
January 29, 2020
Michael Kumhof, Bank of England
Zoltan Jakab, International Monetary Fund
Financial sector problems played a critical role in triggering and prolonging both the Great Depression of 1929 and the Great Recession of 2008.
Authors: Zoltan Jakab and Michael Kumhof
In the loanable funds model, banks are modelled as resource-trading intermediaries that receive deposits of physical resources from savers before lending them to borrowers. In the financing model, banks are modelled as financial intermediaries whose loans are funded by ex-nihilo creation of ledger-entry deposits that facilitate payments among nonbanks. The financing model predicts larger and faster changes in bank lending and greater real effects of financial shocks.