FORMAL ANALOGIES BETWEEN THE ELEMENTARY INCOME DETERMINATION AND CREDIT CREATION MODELS

Abstract

THE elementary income determination and credit creation models2 have been part of the professional economist's tool-kit for more than a generation and have by now become firmly entrenched in the introductory economics curriculum. It is perhaps surprising, then, that the standard expositions of these models fail to emphasize that, from the point of view of their qualitative comparative static predictions, the two models are mathematically equivalent. In this paper we attempt to make good this omission, and, as a by-product, show that there exists a 'balanced credit creation multiplier' which is the formal analogue of the well-known 'balanced budget multiplier'. The paper is divided into two sections: the first section describes a simple credit creation model which might, for pedagogic purposes, be regarded as a rough first approximation to British conditions (Model A); the second section outlines the standard income determination model (Model B), demonstrates that the two models are in some respects mathematically equivalent, argues that this equivalence derives from the fact that both systems are characterized by a particular type of feed-back, and uses the equivalence property to derive the 'balanced credit creation multiplier'.