An Endogenous-Money Theory of Economic Evolution

In the standard multiplier view of the money supply process banks are neutral institutions performing the purely technical task of facilitating the working of the economic process. Another view, related to the modern endogenous money literature, has however emphasized that the level of income and employment is mainly determined by decisions taken jointly by banks and firms. Using this idea we model the evolution of a pure credit economy in which banks and firms have partly competing and partly complementary claims for the relative share of wealth. Our results suggest that banks have an irreplaceable role in the unfolding of the economic process.