Money Creation and Destruction

83 Pages Posted: 8 Aug 2017

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)

Multiple version iconThere are 2 versions of this paper

Date Written: July 24, 2017


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

JEL Classification: D500, E400, E500, G210

Suggested Citation

Faure, Salomon and Gersbach, Hans, Money Creation and Destruction (July 24, 2017). CESifo Working Paper Series No. 6565, Available at SSRN: or

Salomon Faure (Contact Author)

ETH Zürich ( email )

Zurichbergstrasse 18
Zürich, 8092

Hans Gersbach

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

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
PlumX Metrics