Creation of money is the process by which money circulates a country, or from economy or monetary, increases. In most modern economies, most of the money supply is in the form of bank deposits. Central banks monitor the amount of money in the economy by measuring what is called monetary aggregate.
Video Money creation
Money supply
The term "money supply" usually shows the total, secure, financial asset that households and businesses can use to make payments or to be maintained as short-term investments. The money supply is measured using the so-called "monetary aggregate", determined according to their respective liquidity levels: In the United States, for example, M0 for the currency in circulation; M1 for M0 plus deposit of transactions at the depository, such as withdrawal of bank account; M2 for M1 plus savings, small time deposits, and money market mutual funds.
Inventory money is understood to increase through activity by government authorities, by state central banks, and by commercial banks. The money supply is mostly in the form of bank deposits.
Maps Money creation
Creation of money by government spending
State spending is part of the country's fiscal policy. Spending deficits involves spending the state into the economy more than it receives (in taxes and other payments) within a certain period of time, usually the budget year.
Deficit spending increases the money supply. The level and timing of the budget deficit is debated among the schools of economic analysis. The main view is that net spending by the public sector is inflation as far as "financed" by the banking system, including the central bank, and not by selling public debt to the public.
The existence of a budget deficit is generally regarded as inflation by the mainstream economy, so policy is prescribed to lower the deficit, while heterodox economists like the Post-Keynesians treat deficit spending as "only" fiscal policy options.
Creation of money by the central bank
Central banks
The authority through which monetary policy is conducted is the central bank of the country. The central bank's mandate typically includes one of the following three goals or a combination of both, in various order preferences, by country or region: Price stability, ie inflation targeting; maximum job facilitation in the economy; term guarantee, long term, interest rate.
The central bank is a government banker and provides governments with various services at the operational level, such as managing a single Treasury Department account, and also acting as a fiscal agent (eg by running auction), its settlement agent, and its bond registrar. Central banks may become bankrupt in liabilities in foreign currency.
Central banks operate in almost every country in the world, with some exceptions. There are several groups of countries, which, by agreement, an entity acts as their central bank, such as the Central African state organization, all of which have a common central bank, the Bank of Central African States, or monetary unions, such as the Euro Zone, central banks respectively but subject to the policy of the central entity, the ECB. Central banking institutions are generally independent of government executives.
The central bank's activities directly affect interest rates, through basic level control, and indirectly affect share prices, economic wealth, and national currency exchange rates. Monetaris and some Austrians contend that the central bank should control the money supply, through its monetary operations. Critics of the main view maintain that the operations of the central bank may affect but not control the money supply.
Open market operations
Open market operations (OMOs) involve the buying and selling of securities on the open market by the central bank. OMO essentially trades one type of financial asset with another financial asset; when the central bank buys bonds held by banks or the private sector, bank reserves increase while bonds held by banks or the public decline. Temporary operations are typically used to address provisional reserves, while permanent operations accommodate long-term factors that drive the expansion of the central bank's balance sheet; Such a major factor is the trend of money supply growth in the economy. Among temporary operations, an open market is a reverse repo or reverse repo agreement, while a permanent involves the direct purchase or sale of securities. Any open market operations by the central bank affect its balance sheet.
Monetary policy
Monetary policy is the process by which a country's monetary authority, usually a central bank (or currency board), maintains short-term interest rates and affects the availability and cost of credit in the economy, as well as overall economic activity.
The central bank conducts monetary policy usually through open market operations. Debt purchases, and an increase in bank reserves, are called "monetary easing." The exceptional process of monetary easing is symbolized as "quantitative easing", whose goal is to stimulate the economy by increasing liquidity and promoting bank lending.
Creation of money through bank loans
Commercial loans/banks expand the amount of bank deposits. Through fractional reserve banking, the modern banking system can expand the supply of a country's money beyond the amount created or targeted by the central bank, creating the bulk of the money in the system. Auditor & amp; Poor indicates that the existence of excess reserves in the system, regardless of their additional size, does not loosen the reserve constraints on the ability of commercial banks to lend, since "basically there are no backup constraints to start with": banks, state auditors, "will provide what backup also needed. "
The money-credit theory, initiated by Joseph Schumpeter, confirms the central role of the bank as the creator and allocator of money supply, and distinguishes between "creation of productive credits" (allowing non-inflationary economic growth even at full employment, in advance of technological advances) and " productive "(generating good inflation from various consumer prices or assets).
Money multiplier
Banks are limited in total amount they can borrow with their capital adequacy ratio, and the required reserve ratio. The reserve ratio shall oblige banks to keep the minimum, which has been determined, the percentage of their deposits on accounts in the central bank. The mainstream theory states that, in a fractional reserve banking system, where banks typically only hold a small fraction of their deposits in reserves, early bank loans create more money than initially lent.
Rasio maksimum pinjaman terhadap deposito adalah rasio cadangan wajib , yang ditentukan oleh bank sentral, sederhananya
di mana adalah deposito dan cadangan. Oleh karena itu, rasio yang seolah-olah membatasi bank adalah
In practice, if the central bank implements a mandatory reserve ratio (RRR) of 0.10, then every commercial bank is required to keep at least 10% of its total deposits as reserves, ie in accounts in the central bank. In the detailed example: Someone deposited $ 100 in the bank. The bank keeps $ 10 as reserve in the central bank. To make a profit, the bank borrows the remaining $ 90 to the customer. The customer spends the money and the $ 90 recipient deposits it to their bank. The bank keeps $ 9 as reserve in the central bank, and then lends the remaining $ 81. And so on, until the loan becomes so small that they are zero. In the end, an amount close to $ 1000 is expected to be added net to the money supply.
The ratio of total money added to the money supply (in this case, $ 1000) with the total money added initially in the monetary base (in this case, $ 100) is the money multiplier. In this context, the money multiplier transmits changes in the monetary base, which is the amount of bank reserves and currency issued, into the change in the money supply.
Jika perubahan dalam basis moneter menyebabkan perubahan jumlah uang beredar, maka
di mana adalah persediaan uang baru, adalah basis moneter, dan adalah pengganda uang. Oleh karena itu, rumus ex post untuk pengali uang adalah
Bank lending models stimulated through central bank operations (such as "monetary easing") have been rejected by Neo-Keynesians and Post-Keynesian analyzes as well as central banks. The main argument offered by dissident analysis is that any bank balance expansion (eg via a new loan) that makes the bank the required reserve shortage may affect the expected return on the loan, as the bank's additional costs will seek to return within the ratio limit - but this is not and "will never hinder the capacity of banks to lend in the first place." First the banks lend and then cover their reserve ratio: The decision whether or not to borrow generally does not depend on their reserves with the central bank or their savings from customers; banks do not lend deposits or reserves. Banks borrow based on loan criteria, such as customer's business status, loan outlook, and/or overall economic situation.
Physical currency
The central bank, or other competent state authority (such as the Ministry of Finance), is usually empowered to create new physical currencies, namely banknotes and coins, to meet the needs of commercial banks for cash withdrawals, and to replace used and/or currency that was destroyed. The process does not increase the money supply, as it is; the term "printing [new] money" is considered wrong.
In the modern economy, relatively little money supply in physical currency.
Monetary financing
Policy
"Monetary financing", as well as "debt monetization", occurs when the country's central bank buys government debt. This is considered by mainstream analysis to cause inflation, and often hyperinflation. Former IMF chief economist Olivier Blanchard declared it
the government does not create money; central bank. But with the cooperation of the central bank, the government can effectively finance itself with the creation of money. It can issue bonds and ask the central bank to buy them. The central bank then pays the government with the money it generates, and the government in turn uses the money to finance the deficit. This process is called debt monetization.
Process descriptions differ in heterodox analysis. Modern chartalism states that
the central bank has no option to monetize unpaid government debt or newly issued government debt... [A] as long as the central bank has a mandate to keep its short-term interest rate target, its size of buying and selling of government debt is not free. The lack of central bank control over reserves underscores the impossibility of monetization of debt. The central bank can not monetize government debt by purchasing government securities at will because it will cause the short-term target rate to drop to zero or to the level of support that may be in place for excess reserves.
Restrictions
Monetary financing is used to become the standard monetary policy in many countries, such as Canada or France, while in other countries it is still prohibited. In the Euro Zone, Article 123 of the Lisbon Treaty explicitly prohibits the European Central Bank from financing public institutions and state governments. In Japan, the national central bank "regularly" buys about 70% of the state debt issued every month, and has, by 2018, about 418 quadrillion JPÃ, Â ¥ (about $ 3.9quad) or 38% of all government bonds outstanding.
Source of the article : Wikipedia
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