Money creation and circulation in a credit economy

Authored by Yougui Wang, Wanting Xiong, Han Fu

Date Published: 2017

DOI: 10.1016/j.physa.2016.08.023

Sponsors: No sponsors listed

Platforms: No platforms listed

Model Documentation: Other Narrative Flow charts Mathematical description

Model Code URLs: Model code not found

Abstract

This paper presents a multi-agent model describing the main mechanisms of money creation and money circulation in a credit economy. Our special attention is paid to the role of debt in the two processes. With the agent-based modeling approach, macro phenomena are well founded in micro-based causalities. A hypothetical economy composed of a banking system and multiple traders is proposed. Instead of being a pure financial intermediary, the banking system is viewed as the center of money creation and an accelerator of money circulation. Agents finance their expenditures not only by their own savings but also through bank loans. Through mathematical calculations and numerical simulation, we identify the determinants of money multiplier and those of velocity of money. In contrast to the traditional money creation model, the money multiplier is determined not only by the behavior of borrowing but also by the behavior of repayment as well. The velocity of money is found to be influenced by both money-related factors such as the expenditure habits of agents with respect to their income and wealth and debt-related factors such as borrowing and repayment behaviors of debtors and the reserve requirements faced by banks. (C) 2016 The Author(s). Published by Elsevier B.V.

Tags

econophysics Model Debt Cycle Crisis Monetary-policy Money creation Money multiplier Velocity of money circulation Holding time distribution Aggregate demand Velocity Minsky