Money Creation and Destruction

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

See all articles by Salomon Faure

Salomon Faure

ETH Zürich

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Research; 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


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: or

Salomon Faure

ETH Zürich ( email )

Zurichbergstrasse 18
Zürich, 8092

Hans Gersbach (Contact Author)

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

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

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679

Centre for Economic Policy Research (CEPR)

United Kingdom

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