DP13156 | Money Creation in Different Architectures

Publication Date

09/04/2018

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Abstract

We examine monetary architectures in which money is solely created by the public and lent by the central bank to the private sector. We compare them to today's fractional-reserve system in which money is created mainly by commercial banks. We use a simple general equilibrium setting and determine under which conditions these architectures yield the same welfare and stability outcomes and under which conditions they do not. We show, in particular, that the decentralized sovereign money system yields the same level of money creation and allocation of commodities as the fractional-reserve monetary system if the central bank solely pursues interest-rate policy.