Banking strategy and credit expansion: a post-Keynesian approach Antonio J. Alves Jr, Gary A. Dymski and Luiz-Fernando de Paula* This paper aims to clarify the relationship between individual banks and banking industry behaviour in credit expansion. The authors argue that the balance sheet structure of an individual bank is only partially determined by its management’s decision about how aggressively to expand credit; it is also determined by the balance sheet positions of other banks. This relationship is shown explicitly by a simple disaggregation of the variables that enter into the economy-wide money multiplier. The approach taken here revives the multi-bank approach to banking analysis pioneered by Wallace and Karmel in the 1960s, which is particularly well- suited to integrating micro and macro levels in Keynesian banking analysis. Key words: Banking behaviour, Banking firms, Business cycle, Credit, Post- Keynesian theory JEL classifications: E12, E32, E44, G21 1. Introduction This paper takes on two questions about strategic behaviour and systemic outcomes in banking. First, is there any connection between an individual bank’s strategy and the behaviour of the banking system as a whole—and in particular, what are the macroeco- nomic effects of bank behaviour? Second, how does the stage of the business cycle affect banking strategy (and vice versa)? To answer these questions, this paper:  Clarifies and extends a remark by Keynes in his Treatise on Money, concerning the relationship between individual-bank and banking industry behaviour in credit expansion.  Explores how to integrate the micro and macro levels in bank behaviour so as to make explicit the mutual causality between banking-firm strategy and aggregate outcomes.  Examines banks’ strategic incentives in different credit-expansion environments, to develop a clearer understanding of how bank behaviour affects business-cycle dynamics. Manuscript received 7 March 2005; final version received 8 July 2007. Address for correspondence: Prof Luiz-Fernando de Paula, Universidade do Estado do Rio de Janeiro, Faculdade de Cie ˆncias Econo ˆ micas, Rua Sa ˜o Francisco Xavier, 524 sala 8039F, 20550–13, Rio de Janeiro, Brazil; email: luizfpaula@terra.com.br * Universidade Federal Rural do Rio de Janeiro—UFRRJ (antonioj@ufrrj.br); University of California Center Sacramento (gary.dymski@ucop.edu); Universidade do Estado do Rio de Janeiro—FCE/UERJ. The authors would like to thank the participants of seminars held at the Brazilian Society of Political Economy (SEP), UNICAMP, and USP, two anonymous referees and also the Editors of CJE for their insightful comments on an earlier draft of this paper. Remaining errors are the authors’ responsibility. Cambridge Journal of Economics 2008, 32, 395–420 doi:10.1093/cje/bem035 Advance Access publication 7 December, 2007 Ó The Author 2007. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.