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Money creation in the modern economy

  • McLeay, Michael

    ()

    (Bank of England)

  • Radia, Amar

    ()

    (Bank of England)

  • Thomas, Ryland

    ()

    (Bank of England)

This article explains how the majority of money in the modern economy is created by commercial banks making loans. Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.

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Article provided by Bank of England in its journal Bank of England Quarterly Bulletin.

Volume (Year): 54 (2014)
Issue (Month): 1 ()
Pages: 14-27

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Handle: RePEc:boe:qbullt:0128
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  2. Laidler, David, 1984. "The 'Buffer Stock' Notion in Monetary Economics," Economic Journal, Royal Economic Society, vol. 94(376a), pages 17-34, Supplemen.
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  5. Ryland Thomas, 1997. "The Demand for M4: A Sectoral Analysis Part 2 The Corporate Sector," Bank of England working papers 62, Bank of England.
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  11. Christopher Bowdler & Amar Radia, 2012. "Unconventional monetary policy: the assessment," Oxford Review of Economic Policy, Oxford University Press, vol. 28(4), pages 603-621, WINTER.
  12. Carpenter, Seth & Demiralp, Selva, 2012. "Money, reserves, and the transmission of monetary policy: Does the money multiplier exist?," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 59-75.
  13. Solomou, Solomos & Weale, Martin, 1991. "Balanced estimates of UK GDP 1870-1913," Explorations in Economic History, Elsevier, vol. 28(1), pages 54-63, January.
  14. Finn E. Kydland & Edward C. Prescott, 1990. "Business cycles: real facts and a monetary myth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-18.
  15. Ryland Thomas, 1997. "The Demand for M4: A Sectoral Analysis. Part 1 - The Personal Sector," Bank of England working papers 61, Bank of England.
  16. Tucker, Paul & Hall, Simon & Pattani, Aashish, 2013. "Macroprudential policy at the Bank of England," Bank of England Quarterly Bulletin, Bank of England, vol. 53(3), pages 192-200.
  17. Button, Richard & Pezzini, Silvia & Rossiter, Neil, 2010. "Understanding the price of new lending to households," Bank of England Quarterly Bulletin, Bank of England, vol. 50(3), pages 172-182.
  18. Bridges, Jonathan & Rossiter, Neil & Thomas, Ryland, 2011. "Understanding the recent weakness in broad money growth," Bank of England Quarterly Bulletin, Bank of England, vol. 51(1), pages 22-35.
  19. Clews, Roger & Salmon, Chris & Weeken, Olaf, 2010. "The Bank's money market framework," Bank of England Quarterly Bulletin, Bank of England, vol. 50(4), pages 292-301.
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