• Dr. Michael Kumhof

    Michael Kumhof is Senior Research Advisor in the Research Hub of the Bank of England. Before that, he was Deputy Division Chief, at the Modeling Division in the Research Department at the International Monetary Fund (IMF) (2004 to 2015). Kumhof was responsible for developing the Global Integrated Monetary and Fiscal Model of the IMF which is used at several central banks, for IMF policy and scenario analyses, for the World Economic Outlook, and for G20 work. Before that, he was Assistant Professor at Stanford University (1998 to 2004). His research focuses on the role of banks in the economy and on different monetary systems.

Banks are not intermediaries of loanable funds – facts, theory and evidence

In the loanable funds model that dominates the literature, banks are nonfinancial warehouses that receive physical commodity deposits from savers before lending the commodities to borrowers. In the financing model of this paper, banks are financial institutions whose loans create ledger-entry deposits that are essential in commodities exchange among nonbanks. This model predicts larger and faster changes in bank lending and greater real effects of financial shocks. Aggregate bank balance sheets exhibit very high volatility, as predicted by financing models. Alternative explanations of volatility in physical savings, net securities purchases or asset valuations have very little support in the data.

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