Abstract for:Modeling Deposit Creation and Policy Transmission Channel via Money Market Rate – Initial Implications on Stabilization Policy –

Over-simplifications of financial system in macroeconomic models became evident particularly since the financial crisis in 2007-08. Based on Accounting System Dynamics framework, the current research develops a model of a closed economy where banking sector functions as creator of deposits through loans in contrast to the intermediation theory of banking presumed in conventional models. The model structure is extended further to incorporate monetary transmission channel through interest rate on central bank reserves, representing money market determined by its supply-demand relationship. A generic model consisting of five domestic sectors turns out to produce diverse disequilibrium dynamics consistent with stylized facts, driven by interactions of reinforcing and balancing feedback loops such as expansion of money supply under stable and low level of monetary base, short-term business cycles, temporary alleviation of GDP gap by monetary easing policy, and its limitation in fully counteracting structural deflation. The paper also discusses assumptions and corresponding limitations of the model. While exploratory in nature, simulation experiments indicate positively that the model could be applied for empirical analysis based on time-series data.