ECON 1009 Lecture Notes - Lecture 11: Money Creation, Monetary Base, Financial Regulation
25 Jan 2023
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Document Summary
Our objectives this week are for students to be able to describe the process of commercial bank credit creation. To describing the limitations on that process. To explain the view held in major central banks that the money multiplier theory, as it is often described in text-books, is a myth. Lessons to be learned from a balance sheet approach to credit creation. Banks create money (but not base money) as they lend. Banks create money" out of nothing, when they create credit. This is absolutely right, since they create deposits and bank deposit liabilities are regarded as money" (and make up most of broad money"). However, they need to find creditworthy customers who are prepared to pay them a high enough interest rate to cover their costs and make a profit; and to meet their capital adequacy and other regulatory requirements.
