Inside (the) Money Machine: Modeling Liquidity, Maturity and Credit Transformations
IMF Working Papers, August 22, 2025
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- Inside (the) Money Machine: Modeling Liquidity, Maturity and Credit Transformations
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Bibliographic details
- Authors: Shalva Mkhatrishvili
- Published: August 22, 2025
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229020176.001
Summary and purpose
- The paper develops a tractable macro-banking model to fill a gap: there is no tractable quantitative macro framework that models endogenous money creation while simultaneously addressing interlinked solvency, liquidity, maturity, regulatory, and demand constraints.
- Emphasis on two key frictions:
- the capital adequacy constraint (generating a credit risk premium)
- the central bank’s collateral base constraint (generating a liquidity risk premium)
- Model simulations produce conclusions for both normal times and stress episodes, including outcomes frequently overlooked in existing literature.
- The model creates a bridge between a money-centered view of the price level and the fiscal theory of the price level.
Model features and scope
- Focuses on five aspects that act as breaks on banks’ money-creation abilities: solvency, liquidity, maturity risks, regulatory constraints, and demand constraints — described as tightly and nonlinearly interlinked.
- Highlights interactions between capital and liquidity regulations.
- Illustrates endogenous creation of (inside) money by banks and associated risk premia mechanisms.
Key findings (from model simulations)
- Within capital requirements, setting lower risk weights on secured loans may lead to an expansion of unsecured loans.
- The model reveals subtle interactions between capital and liquidity regulations that affect banks’ money-creation abilities.
- Produces insights for both normal times and stress episodes; identifies conclusions that were frequently overlooked by prior work.
- Establishes a certain bridge between a money-centered view of the price level and the fiscal theory of the price level.
Subject areas and keywords
- Subject: Collateral, Credit risk, Financial institutions, Financial regulation and supervision, Financial statements, Liquidity risk, Loans, Public financial management (PFM)
- Keywords: Collateral, Credit risk, Endogenous Money Creation, Financial statements, Fiscal Theory of the Price Level, Global, Liquidity risk, liquidity risk premium, Loans, macro-banking model, Macro-Banking Modeling, Macroprudential Policy, maturity risk, model simulation, modeling liquidity, Monetary Policy, money-creation ability
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- Working Paper