Munich Personal RePEc Archive

Banks' Contribution to Government Debts

Rohwer, Götz and Behr*, Andreas (2020): Banks' Contribution to Government Debts.

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Abstract

The paper argues that an important contribution of private banks to the expansion of government debts, and thereby to the increase in the money supply, is based on their being mediators of government expenditures. In order to develop the argument the paper distinguishes between two money circuits: one, which includes the government, starts from the central bank, and another one, which includes the final recipients of government expenditures, starts from private banks and is based on their deposit money. Presupposing then an institutional setting in which only private banks are permitted to initially purchase government bonds on the primary market, the paper shows that private banks can finance these purchases with their own deposit money.

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