Money creation in the modern economy

Quarterly Bulletin 2014 Q1

”Banks making loans and consumers repaying them are the most significant ways in which bank deposits are created and destroyed in the modern economy. But they are far from the only ways. Deposit creation or destruction will also occur any time the banking sector (including the central bank) buys or sellsexistingassetsfromortoconsumers,or,moreoften, from companies or the government.

Banks buying and selling government bonds is one particularly important way in which the purchase or sale of existing assets by banks creates and destroys money. Banks often buy and hold government bonds as part of their portfolio of liquid assets that can be sold on quickly for central bank money if, for example, depositors want to withdraw currency in large amounts.(1) Whenbankspurchasegovernmentbondsfrom the non-bank private sector they credit the sellers with bank deposits.(2) And,asdiscussedlaterinthisarticle,centralbank asset purchases, known as quantitative easing (QE), have similar implications for money creation…….”

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