So I learned this week that some people actually believe that mainstream macroeconomists believe that "banks create money" in a way that is *substantively the same* as the claim that "banks create money" made by heterodox economists. 1/

(Given that there are raging debates *between* heterodox economists about the substance of what it means to say that "banks create money" the idea that there are no substantive differences with an outside group is hard to understand, but let's not go there.) 2/

I want to discuss what we would see in mainstream macroeconomics, if the claim were true that they understand that "banks create money" in a way that is comparable to (my view of) the heterodox understanding of it. 3/

(Caveat: I have an approach to banking that is basically a version of circuit theory, but I have never formally studied heterodox economics, and have no right to claim expertise in it. OTOH I’m familiar w mainstream macro models.) 4/

(i) The use of price-taking equilibrium models to study money would be rare, because it is well established that price-taking equilibrium itself assumes a perfect banking/financial system. (Can someone help w citations. Recall reading this in grad school, but not where.) 5/

(ii) There would be a huge literature on models where debt is issued based on reputation, trust, or network effects, since that is necessary to capture the ideas that (a) banks can "write up" the money supply (b) subject only to the constraint that their IOUs are accepted. 6/

Note that due to (i) this class of models should not as a rule include a neoclassical-market-based outside option (e.g. Kehoe and Levine REStud 1993) since that will ex ante preclude the study of banking. 7/

Note also that, while the study of collateralized lending is interesting in itself, this literature on banking cannot be constrained by collateral or "cash" requirements since that is not consistent with "writing up" the money supply. 8/

Finally the end goal of this literature would be to study the relationship btw reputation/trust-based credit, nominal prices &real activity. That is, it would involve studying the right kind of credit in a model with money but not price-taking eqm. Which is a very tall order. 9/

So if mainstream macroeconomists understand that "banks create money" in substantively the same way that heterodox economists do, please show me this literature to support your claim. 10/10
cc: @TomHale_ @Britonomist