Revenues from Financial Capital. A Formal Framework

Rohwer, Götz and Behr*, Andreas (2020): Revenues from Financial Capital. A Formal Framework.

Abstract

The paper proposes a framework for a formal discussion of the sources of revenues which can be attributed to financial capital. The framework refers to individual units (firms, households, state institutions) and therefore allows for a representation of ownership relations. The framework distinguishes between central bank money and deposit money created by private banks and assumes an institutional setting in which the central bank is not permitted to directly finance state institutions. The paper considers a broad and a narrow definition of revenues. The broad definition includes revenues having origins in banks’ expansion of the money supply (in particular, revenues from new debts). Referring to this broad notion we find that the sum of these revenues has two sources: (1) revenues which public companies and investment funds receive from participating in the real economy (activities which aim to receive revenues from selling goods, services, and labor) and (2) the expansion of the money supply. The narrow definition includes only revenues from interest and from shares in public companies and investment funds. We find that the sum of these financial gains almost completely originates from revenues which public companies and investment funds receive from participating in the real economy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial capital, revenues from financial capital, endogenous money, integrated ownership
• Subjects: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit

References

Baldone, S., Brioschi, F., Paleari, S. 1997. Ownership measures among firms connected by cross-shareholdings and a further analogy with input-output theory. Mimeo.

Bezemer, D.J. 2016. Towards an ‘accounting view’ of money, banking and the macroeconomy: history, empirics, theory. Cambridge Journal of Economics 40, 1275–1295.

Bezemer, D., Hudson, M. 2016. Finance is not the economy: Reviving the conceptual distinction. Journal of Economic Issues 50, 745–768.

Bibow, J. 2001. The loanable funds fallacy: exercises in the analysis of disequilibrium. Cambridge Journal of Economics 25, 591–616.

Cardim de Carvalho, F.J. 2012. Aggregate savings, finance and investment. European Journal of Economics and Economic Policies: Intervention 9, 197–213.

Jakab, Z., Kumhof, M. 2019. Banks are not Intermediaries of Loanable Funds – Facts, Theory and Evidence. Bank of England, Staff Working Paper No. 761.

Lindner, F. 2015. Does saving increase the supply of credit? A critique of loanable funds theory. World Economic Review 4, 1–26.

McLeay, M., Radia, A., Thomas, R. 2014. Money creation in the modern economy. Bank of England Quarterly Bulletin 54 (Q1), 14–27.

Werner, R.A. 2014. How do banks create money, and why can other firms not do the same? An explanation for the coexistence of lending and deposit-taking. International Review of Financial Analysis 36, 71–77.