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On the Money Creation Approach to Banking

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  • Gersbach, Hans
  • Faure, Salomon

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.

Suggested Citation

  • Gersbach, Hans & Faure, Salomon, 2016. "On the Money Creation Approach to Banking," CEPR Discussion Papers 11368, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11368
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    Cited by:

    1. Gersbach, Hans & Zelzner, Sebastian, 2022. "Why Bank Money Creation?," CEPR Discussion Papers 17753, C.E.P.R. Discussion Papers.
    2. Salomon Faure & Hans Gersbach, 2022. "Loanable funds versus money creation in banking: a benchmark result," Journal of Economics, Springer, vol. 135(2), pages 107-149, March.
    3. Althanns, Markus & Gersbach, Hans, 2023. "The Monetary Policy Haircut Rule," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277597, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    Money creation - bank deposits - capital regulation - zero lower bound - monetary policy - price rigidities;

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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