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Date
2016-07Type
- Working Paper
ETH Bibliography
yes
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Abstract
We develop a general equilibrium model to study money creation by private banks and examine the impact of monetary policy and capital regulation. There are two production sectors, financial intermediation, aggregate shocks, safe deposits, and two types of money creation: private deposits when banks grant loans to firms or to other banks and central bank money when the central bank grants loans to private banks. We show that in the baseline model, equilibria yield the first-best level of money creation and lending, regardless of the monetary policy or capital regulation. If we add price rigidities coupled with the zero lower bound, there may be no equilibrium with banks, but undernormal economic conditions, an adequate combination of monetary policy and capital regulation can restore the existence of equilibria and efficiency. Finally, we show that Forward Guidance and capital regulation can only avoid a slump in money creation and lending if economic conditions are sufficiently favorable. Show more
Publication status
publishedJournal / series
CEPR Discussion PapersPages / Article No.
Publisher
Centre for Economic Policy ResearchSubject
Money creation; Bank deposits; Capital regulation; Zero lower bound; Monetary policy; Price rigiditiesOrganisational unit
03729 - Gersbach, Hans / Gersbach, Hans
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ETH Bibliography
yes
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