Money creation and destruction

Research English OPEN
Faure, Salomon ; Gersbach, Hans (2016)
  • Publisher: Munich: Center for Economic Studies and Ifo Institute (CESifo)
  • Subject: E40 | bank deposits | capital regulation | E50 | G21 | money creation | monetary policy | E4 | E5 | zero lower bound | D50 | price rigidities
    • jel: jel:G21 | jel:D50 | jel:E4 | jel:E5
      ddc: ddc:330

We study money creation and destruction in today’s monetary architecture and examine the impact of monetary policy and capital regulation in a general equilibrium setting. There are two types of money 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 equilibria yield the first-best level of money creation and lending when prices are flexible, 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 the ones in which an adequate combination of monetary policy and capital regulation can restore efficiency.
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