Banks are not intermediaries of loanable funds – and why this matters

Zoltan Jakab & Michael Kumhof

Problems in the banking sector played a critical role in triggering and prolonging the Great Recession. Unfortunately, standard macroeconomic models were initially not ready to provide much support in thinking about the role of banks. This has now changed, with many new papers that study the interaction of banks with the macroeconomy. However, as emphasized by Adrian, Colla and Shin (2013), there are many unresolved issues. In our new paper “Banks Are Not Intermediaries of Loanable Funds – And Why This Matters” (Jakab and Kumhof (2015)), we argue that many of them can be traced to the fact that virtually all of the newly developed models are based on the intermediation of loanable funds (ILF) theory of banking. Continue reading “Banks are not intermediaries of loanable funds – and why this matters”