DP13156 Money Creation in Different Architectures

Author(s): Salomon Faure, Hans Gersbach
Publication Date: September 2018
Date Revised: August 2019
Keyword(s): 100% reserve banking, Capital regulation, Chicago Plan, full-reserve banking, monetary architecture, monetary policy, monetary system, money creation, price rigidities, reserve requirement
JEL(s): D50, E4, E5, G21
Programme Areas: Public Economics, Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13156

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.