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Economic Theory of Bank Credit$
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L. Albert Hahn

Print publication date: 2015

Print ISBN-13: 9780198723073

Published to Oxford Scholarship Online: November 2015

DOI: 10.1093/acprof:oso/9780198723073.001.0001

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The Influence of Credit on Goods Production

The Influence of Credit on Goods Production

(p.154) (p.155) [2.*]A. The Influence of Credit on Goods Production
Economic Theory of Bank Credit

L. Albert Hahn

Oxford University Press

Credit expansion (inflationary or non-inflationary) lowers interest rates and makes longer production processes relatively more attractive and more roundabout methods of production are chosen. An elongation of the production process increases the amount of simultaneously available goods but this increase is driven by consumption goods that are diverted into production. Credit expansion widens the flow of goods and could lead to an increase in employment as new ventures become profitable. The effect on prices and wages (and subsequently the business cycle) depends on whether or not the credit is inflationary. Non-inflationary credit does not change the price or wage level because additional savings counteract the effects of credit expansion. Inflationary credit, however, increases prices and nominal wages; this induces higher demand and consequently further credit expansion. This effect reinforces itself until firms no longer expect further price rises and the expansion comes to a halt and the economic downturn begins.

Keywords:   credit expansion, inflationary credit, non-inflationary credit, inflation, price expectation

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