BoE research warns failure to capture money creation distorts DSGE models
Paper gives 'essential ingredients' of improved model
Central banks' "workhorse" dynamic stochastic general equilibrium (DSGE) models have been producing misleading results in part because of a failure to incorporate the correct theory of money creation, argues research published today (May 29) by the Bank of England (BoE).
Macroeconomists recognise the dated textbook model of money creation, where savings are "multiplied up" by bank lending, is wrong. Instead money is created by banks' lending decisions, and money supply constrained by banks'
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