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Money creation, or money issuance, is the process by which the money supply of a country, or an economic or monetary region,[note 1] is increased. In most modern economies, money is created by both central banks and commercial banks. Money issued by central banks is a liability, typically called reserve deposits, and is only available for use by central bank account holders, which are generally large commercial banks and foreign central banks. Central banks can increase the quantity of reserve deposits directly, by making loans to account holders, purchasing assets from account holders, or by recording an asset, such as a deferred asset, and directly increasing liabilities. However, the majority of the money supply used by the public for conducting transactions is created by the commercial banking system in the form of commercial bank deposits. Bank loans issued by commercial banks expand the quantity of bank deposits.[1]
Money creation occurs when the amount of loans issued by banks increases relative to the repayment and default of existing loans. Governmental authorities, including central banks and other bank regulators, can use various policies, mainly setting short-term interest rates, to influence the amount of bank deposits commercial banks create.[2]
Cite error: There are <ref group=note> tags on this page, but the references will not show without a {{reflist|group=note}} template (see the help page).
- ^ Bell, Stephanie. "The Role of the State and the Hierarchy of Money". Research Gate. Cambridge Journal of Economics. Retrieved 29 December 2023.
- ^ European Central Bank (20 June 2017). "What is money?". European Central Bank. Retrieved 8 March 2018.