ABSTRACT
Along the lines of the new generation of studies which depart the equilibrating role of the credit sector in macroeconomic modeling, this chapter provides a behavioral theoretical macrofinancial framework to study the implications of broad and narrow banking for macroeconomic stability. The general theoretical framework featuring a broad banking system is introduced by means of the discussion of the balance sheets and flow accounts of the different sectors of the economy. It explains the stability properties of a broad banking macrofinancial system. The chapter discusses modification of the theoretical model is towards a narrow banking system and analysis its stability properties. It concludes by considering the perils for macroeconomic stability of a broad banking system where commercial banks are allowed to trade in capital assets as a substitute for traditional lending activities.
