Monetary Insatiability and Bank-Based Financing

In the economic literature, various definitions exist for different types of interest rates (intertemporal, intratemporal, subjective, as well as monetary and banking), which are often referred to under the same interpretation. However, interest rates have diverse effects on macroeconomic variables and play a crucial role in regulating economic activities. From a theoretical perspective, the current model of bank-based financing, due to the characteristic of monetary insatiability in money demand and the presence of speculative motives, generates deficiencies that specifically result in limiting the level of employment, inefficient production, and the emergence of inflation. This characteristic, alongside the dual origin of banking interest rates in both intertemporal and intratemporal dimensions, not only creates economic disequilibrium but also renders the activities of the real sector unjustifiable, even when returns exceed banking interest rates. Therefore, a deeper look into the role of different types of interest rates in the economy, and particularly the effects of monetary interest, appears essential. The present study first explains that the existence of intratemporal interest rates and the property of monetary insatiability hinder the formation of full employment equilibrium and lead to persistent unemployment. Then, using principles of microeconomics, it demonstrates: (1) under conditions of a positive monetary interest rate, although growth and credit allocation may promote production growth, specifically due to the impact of inflation on consumers and the dominance of credit acquisition costs over its benefits, it cannot guarantee social welfare (including the banking institution, the production sector, and consumer groups); (2) credit allocation will not have negative effects only if the monetary interest rate is at most equal to zero. Based on the results, the study suggests examining bank financing within the framework of participatory banking, in which production needs are met through the existing liquidity pool, as a solution that can ensure an increase in production alongside higher welfare for the final consumer.