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Should banks create money?

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  • Wipf, Christian

Abstract

How costly are proposals such as 100% reserve narrow banking or a central bank digital currency, which constrain private banks’ ability to issue monetary demand deposits? The paper shows that, contrary to widespread concerns, if banks have economically viable alternatives to deposits for funding, constraining bank deposit issuance need not raise loan rates and thus crowd out bank lending. Instead, welfare costs arise from lower interest payments on deposits, which weakens the protection for deposit holders against inflation. A calibration to the U.S. economy suggests, however, that these costs are relatively small, especially when bank reserves are remunerated.

Suggested Citation

  • Wipf, Christian, 2026. "Should banks create money?," European Economic Review, Elsevier, vol. 185(C).
    • Handle: RePEc:eee:eecrev:v:185:y:2026:i:c:s0014292126000061
    DOI: 10.1016/j.euroecorev.2026.105262
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    Keywords

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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Systems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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