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Money Creation and Destruction

Salomon Faure and Hans Gersbach ()

No 6565, CESifo Working Paper Series from CESifo Group Munich

Abstract: We study money creation and destruction in today’s monetary architecture within a general equilibrium setting. Two types of money are created and destructed: bank deposits, when banks grant loans to firms or to other banks, and central bank money, when the central bank grants loans to private banks. We show that symmetric equilibria yield the first-best allocation when prices are exible, regardless of the monetary policy or capital regulation. When prices are rigid, we identify the circumstances in which money creation is excessive or breaks down and how an adequate combination of monetary policy and capital regulation may restore efficiency.

Keywords: money creation; bank deposits; capital regulation; zero lower bound; monetary policy; price rigidities (search for similar items in EconPapers)
JEL-codes: D50 E40 E50 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pay
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
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Working Paper: Money creation and destruction (2016) Downloads
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