A Generalized Exposition of Money Creation in the Money and Banking Course

Eran Guse and David W. Brasfield

The American Economist, 2020, vol. 65, issue 2, 244-263

Abstract: Since the Great Recession, monetary policy conducted by the U.S. Federal Reserve and other central banks has changed. However, the discussion regarding money creation and the money multiplier has not been altered in undergraduate money and banking textbooks. We suggest a change to the presentation of money creation by first removing the use of T-accounts and replacing them with a visual representation known as the money production diagram. We then present a money production function that is much like a standard production function as described in principles courses. The money multiplier is replaced by the average product of the monetary base in this production function. We use this production function to explain changes to the money supply from exogenous shocks or changes to policy. JEL classification : A22, E51, E52

Keywords: money multiplier; monetary policy; money and banking; quantitative easing; interest on reserves (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:sae:amerec:v:65:y:2020:i:2:p:244-263

DOI: 10.1177/0569434519891974

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