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Discussion Paper Details

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Title: On the Money Creation Approach to Banking

Author(s): Salomon Faure and Hans Gersbach

Publication Date: June 2016

Keyword(s): Money creation - Bank deposits - Capital regulation - Zero lower bound - Monetary policy - Price rigidities

Programme Area(s): Financial Economics and Monetary Economics and Fluctuations

Abstract: We study today's two-tier money creation and destruction by commercial banks via deposit/loan creation to firms and by central banks via deposit/loan creation to commercial banks. In a simple general equilibrium setting, we show that symmetric equilibria yield the first-best level of money creation and lending when prices are flexible, regardless of monetary policy and 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. Finally, we provide a series of extensions and generalizations of the results.

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Bibliographic Reference

Faure, S and Gersbach, H. 2016. 'On the Money Creation Approach to Banking'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11368