On the Money Creation Approach to Banking

Hans Gersbach and Salomon Faure

No 11368, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study today's two-tier money creation and destruction by commercial banks via deposit/loan creation to firms and by central banks via deposit/loan creation 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: 2016-06
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ger, nep-mac and nep-mon
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Journal Article: On the money creation approach to banking (2021)
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