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Money Creation in Fiat and Digital Currency Systems

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  • Mr. 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, the paper aims to convey two related points: 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 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

  • Mr. Marco Gross & Christoph Siebenbrunner, 2019. "Money Creation in Fiat and Digital Currency Systems," IMF Working Papers 2019/285, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2019/285
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    9. Anjan V. Thakor & Edison Yu, 2023. "Funding Liquidity Creation by Banks," Working Papers 23-02, Federal Reserve Bank of Philadelphia.
    10. Xin, Baogui & Jiang, Kai, 2023. "Central bank digital currency and the effectiveness of negative interest rate policy: A DSGE analysis," Research in International Business and Finance, Elsevier, vol. 64(C).
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