On the money creation approach to banking

Salomon Faure () and Hans Gersbach
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Salomon Faure: ETH Zurich

Annals of Finance, 2021, vol. 17, issue 3, No 1, 265-318

Abstract: Abstract We study today’s two-tier money creation and destruction system: Commercial banks create bank deposits (privately created money) through loans to firms or asset purchases from the private sector. Bank deposits are destroyed when households buy bank equity or when firms repay loans. Central banks create electronic central bank money (publicly created money or reserves) through loans to commercial banks. In a simple general equilibrium setting, we show that symmetric equilibria yield the first-best level of money creation and lending when prices are flexible, regardless of monetary policy and capital regulation. When prices are rigid, we identify the circumstances in which money creation is excessive or breaks down and the ones in which an adequate combination of monetary policy and capital regulation can restore efficiency. Finally, we provide a series of extensions and generalizations of the results.

Keywords: Money creation; Bank deposits; Capital regulation; Zero lower bound; Monetary policy; Price rigidities (search for similar items in EconPapers)
JEL-codes: D50 E4 E5 G21 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (4)

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Working Paper: On the Money Creation Approach to Banking (2016)
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DOI: 10.1007/s10436-021-00385-5

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