Money Creation in Fiat and Digital Currency Systems
IMF Working Papers, December 20, 2019
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- Money Creation in Fiat and Digital Currency Systems
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Bibliographic details
- Authors: Marco Gross, Christoph Siebenbrunner
- Published: December 20, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513521565.001
Main thesis
- The paper supports the understanding that banks’ debt issuance means money creation, while centralized nonbank financial institutions’ and decentralized bond market intermediary lending does not.
- It conveys two related points:
- 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.
- 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.
- The discussion is linked 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.
Key findings and analysis
- Banks’ loan creation entails debt issuance that constitutes money creation.
- Centralized nonbank financial institutions’ lending and decentralized bond market intermediary lending do not constitute money creation.
- Liquid fund (reserve) transfers across banks occur naturally in a multi-bank system and are compatible with banks’ money-creation role.
- The effectiveness of interest rate–based monetary policy depends on the existence of a multi-bank structure; policy transmission would be undermined in a system with a single (“singular”) commercial bank.
Implications for CBDC design and lending
- The paper links its theoretical and systemic analysis to the emergence and design of central bank digital currencies (CBDC).
- Special focus is placed on how loans would be granted in a CBDC world, implying the need to consider the interaction between bank money creation and CBDC architecture.
Subjects and keywords (as presented)
- Subjects: Bank credit, Banking, Central banks, Commercial banks, Currencies, Currency issuance, Financial institutions, Monetary base, Money
- Keywords: bank, bank agent, Bank credit, bank transfer, central bank digital currencies, Commercial banks, Currencies, Currency issuance, deposit account, equity ratio, Global, lending, liquid funding, Monetary base, monetary policy, Money creation, money creation understanding, money creation view, money stock, nonbank, nonbank lending, process, WP
Source: Money Creation in Fiat and Digital Currency Systems — https://www.imf.org/en/publications/wp/issues/2019/12/20/money-creation-in-fiat-and-digital-currency-systems-48843
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