Money Creation and Destruction

77 Pages Posted: 10 Nov 2016 Last revised: 11 Jan 2018

See all articles by Salomon Faure

Salomon Faure

ETH Zurich

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

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Date Written: October 8, 2016

Abstract

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.

Keywords: Money Creation, Bank Deposits, Capital Regulation, Zero Lower Bound, Monetary Policy, Price Rigidities

JEL Classification: D50, E4, E5, G21

Suggested Citation

Faure, Salomon and Gersbach, Hans, Money Creation and Destruction (October 8, 2016). CFS Working Paper, No. 555. Available at SSRN: https://ssrn.com/abstract=2866473 or http://dx.doi.org/10.2139/ssrn.2866473

Salomon Faure

ETH Zurich ( email )

Zurichbergstrasse 18
ZUE D11
Zürich, 8092
Switzerland

Hans Gersbach (Contact Author)

ETH Zurich - CER-ETH -Center of Economic Reseaarch ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland
+41 44 632 82 80 (Phone)
+41 44 632 18 30 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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