14 Quarterly Bulletin 2014 Q1

Apuntes

14 Quarterly Bulletin 2014 Q1 Money creation in the modern economy By Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate. (1)  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’. Overview In the modern economy, most money takes the form of bank low and stable inflation. In normal times, the Bank of deposits. But how those bank deposits are created is often England implements monetary policy by setting the interest misunderstood: the principal way is through commercial rate on central bank reserves. This then influences a range of banks making loans. ...