Bank of Lithuania

Credit and money creation from the integrated accounts perspective


In this paper we apply the analytical integrated accounts framework to conduct a conceptual analysis of essential macrofinancial linkages. In particular, we analyse the macroeconomic mechanism of the creation of purchasing power through bank credit, explore the partial self-financing property of bank credit and the links between bank credit and money creation, and discuss the role of debt accumulation as a powerful demand-side driver of growth. We argue that creation of money and purchasing power is an indispensable corollary of bank credit issuance. Contrary to conventional wisdom, credit is not predicated on existing savings. It directly adds to domestic demand, which translates into some combination of stronger domestic economic activity, stronger foreign economic activity or higher prices, with particular configuration depending on the structural features of the economy. However, credit-driven growth may result in a systemic over-reliance on continuous debt accumulation and poses the risk of deep structural imbalances and balance sheet recessions.

JEL Codes: E51, E58, G21.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

Tomas Ramanauskas, Skirmantė Matkėnaitė, Virgilijus Rutkauskas, bank lending, credit creation, money creation, national accounts, integrated accounts, macroeconomic and financial linkages