On the money creation approach to banking

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.

Caros: Climate Risk-Adjusted Refinancing Operations

“…Fourth, our paper is connected to the literature on private money creation, as it accounts for the dual role of banks, providing both credit and money, in the form of bank deposits, to the real economy. Recent contributions are Gersbach and Faure (2020) and Benigno and Robatto (2019), for instance. Our monetary architecture is particularly close to the one described in Faure and Gersbach (2017) who emphasize the hierarchical structure of many modern monetary systems and analyze various stylized elements: First, the money stock available to the public mainly takes the form of deposits and is only to a minor extent in the form of cash.…”

Why Bank Money Creation?

“…In modern times, the money banks create is a claim on fiat money which is created by the central bank. Different modeling approaches are pursued and applied to capture this (Skeie, 2008;Jakab and Kumhof, 2019;Wang, 2019;Bolton et al, 2020;Faure and Gersbach, 2021;Piazzesi et al, 2021;Wang, 2021;Li and Li, 2021;Parlour et al, 2022). 6 In this paper, we provide a rationale why our current monetary system, in which banks have the privilege to create private money as claims on public fiat money, is advantageous when there is unobservable heterogeneity among banks.…”

“…See https: //www.vollgeld-initiative.ch/english/. The proposal was rejected.2 For a more detailed analysis of the current monetary system, seeFaure and Gersbach (2021).…”