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Money creation and liquid funding needs are compatible

In: Central Banking, Monetary Policy and the Future of Money

Author

Listed:
  • Marco Gross
  • Christoph Siebenbrunner

Abstract

To support the understanding that banks' debt issuance means money creation, while centralized nonbank financial institutions' and decentralized bond market intermediary lending does not, we aim to convey two related points in this paper: First, the notion of money creation as a result of banks' loan creation is compatible with the notion of liquid funding needs in a multi-bank system, in which liquid fund (reserve) transfers across banks happen naturally. Second, interest rate-based monetary policy has a bearing on macroeconomic dynamics precisely due to that multi-bank structure. It would lose its impact in the hypothetical case that only one ("singular") commercial bank (and no cash) would exist. We link our discussion to the emergence and design of central bank digital currencies (CBDC), with a special focus on how loans would be granted in a CBDC world.

Suggested Citation

  • Marco Gross & Christoph Siebenbrunner, 2022. "Money creation and liquid funding needs are compatible," Chapters, in: Guillaume Vallet & Sylvio Kappes & Louis-Philippe Rochon (ed.), Central Banking, Monetary Policy and the Future of Money, chapter 6, pages 154-186, Edward Elgar Publishing.
    • Handle: RePEc:elg:eechap:20227_6
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