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Information Journal Paper

Title

The Nature of Banks and the Money Creation Process; Criticism of Common Views and Implications

Pages

  1-30

Abstract

 The financial crisis in 2008 attracted the attention of the economists and central banks to the deficiencies of the common views on the nature of banks and their role in economy. Since an important prerequisite for micro-prudential and macro-prudential regulation is macroeconomic modeling including the financial sector, consistent monetary and fiscal policy making, and a correct and complete analysis about the nature of banks and the banking system, the present paper uses a descriptive-analytical method to investigate the three approaches to it. Thus, the common views about banks (“ financial intermediation” and “ deposit multiplier” ) are explained and criticized on the basis of monetary and accounting principles. Moreover, the correct view about the nature of banks ("money creation of individual banks") will be explained, citing the opinions of leading economists and central banks. Analyzing the arguments offered in support of the “ financial intermediation” and “ deposit multiplier” views shows that the main roots of misunderstanding the nature of banks are: the notion about money being a sort of commodity, fallacy of composition and the confusion of microeconomic and macroeconomic arguments, neglecting the double-entry bookkeeping principles, failing to differentiate between the banks’ and the central bank’ s balance sheet, and lack of attention to the implications of interest rates targeting policy by the central banks. Accordingly, some principles adhering to which can guarantee a correct analysis of banks is introduced, and some implications of “ money creation” view about banks in Islamic banking, monetary policy, banking regulation and macroeconomic modeling is explained.

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    • Cite

    APA: Copy

    KOMIJANI, AKBAR, ABRISHAMI, HAMID, & ROHANI, SEYED ALI. (2018). The Nature of Banks and the Money Creation Process; Criticism of Common Views and Implications. JOURNAL OF ECONOMIC ESSAYS, 15(29 ), 1-30. SID. https://sid.ir/paper/384819/en

    Vancouver: Copy

    KOMIJANI AKBAR, ABRISHAMI HAMID, ROHANI SEYED ALI. The Nature of Banks and the Money Creation Process; Criticism of Common Views and Implications. JOURNAL OF ECONOMIC ESSAYS[Internet]. 2018;15(29 ):1-30. Available from: https://sid.ir/paper/384819/en

    IEEE: Copy

    AKBAR KOMIJANI, HAMID ABRISHAMI, and SEYED ALI ROHANI, “The Nature of Banks and the Money Creation Process; Criticism of Common Views and Implications,” JOURNAL OF ECONOMIC ESSAYS, vol. 15, no. 29 , pp. 1–30, 2018, [Online]. Available: https://sid.ir/paper/384819/en

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