Chair of Innovation, Competition Policy and New Institutional Economics

2012-15

Number
2012-15
Authors
Matthias Lengnick, Sebastian Krug, Hans-Werner Wohltmann
Title
Money Creation and Financial Instability - An Agent-Based Credit Network Approach
Abstract We pick up the standard textbook approach of money creation and develop a simple agent-based alternative. We show that our model is well suited to explain the endogenous creation of money. Although more general, our model still contains the standard results as a limiting case. We also uncover a potential instability that is hidden in the standard approach but easily recognized within a strict individual-based and stock-flow consistent version. We show in detail how individual interactions build up systemic risk and how banking crises are triggered by the maturity mismatch of different cash-flows and spread by the depreciation of non-performing loans (e.g. interbank- or government debt).

Keywords: Financial instability, endogenous money, agent-based macroeconomics, stock-flow consistency, disequilibrium analysis

JEL classification: C63, E42, E51, G01
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