Money Creation in Different Architectures

59 Pages Posted: 17 Sep 2018 Last revised: 19 Aug 2019

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)

Date Written: September 2018

Abstract

We examine monetary architectures in which money is solely created by the public and lent by the central bank to the private sector. We compare them to today's fractional-reserve system in which money is created mainly by commercial banks. We use a simple general equilibrium setting and determine under which conditions these architectures yield the same welfare and stability outcomes and under which conditions they do not. We show, in particular, that the decentralized sovereign money system yields the same level of money creation and allocation of commodities as the fractional-reserve monetary system if the central bank solely pursues interest-rate policy.

Keywords: 100% reserve banking, Capital regulation, Chicago Plan, full-reserve banking, monetary architecture, monetary policy, monetary system, money creation, price rigidities, reserve requirement

JEL Classification: D50, E4, E5, G21

Suggested Citation

Faure, Salomon and Gersbach, Hans, Money Creation in Different Architectures (September 2018). CEPR Discussion Paper No. DP13156, Available at SSRN: https://ssrn.com/abstract=3247228

Salomon Faure (Contact Author)

ETH Zürich ( email )

Zurichbergstrasse 18
ZUE D11
Zürich, 8092
Switzerland

Hans Gersbach

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