Money Creation and Destruction

83 Pages Posted: 8 Aug 2017

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: July 24, 2017

Abstract

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: https://ssrn.com/abstract=3014756

Salomon Faure (Contact Author)

ETH Zurich ( email )

Zurichbergstrasse 18
ZUE D11
Zürich, 8092
Switzerland

Hans Gersbach

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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