On the money creation approach to banking

Abstract We study today’s two-tier money creation and destruction system: Commercial banks create bank deposits (privately created money) through loans to firms or asset purchases from the private sector. Bank are destroyed when households buy equity repay loans. Central electronic central (publicly reserves) commercial banks. In a simple general equilibrium setting, we show that symmetric equilibria yield first-best level of lending prices flexible, regardless monetary policy capital regulation. When rigid, identify circumstances in which is excessive breaks down ones an adequate combination regulation can restore efficiency. Finally, provide series extensions generalizations results.