Working Paper: CEPR ID: DP13156
Authors: Salomon Faure; Hans Gersbach
Abstract: We examine monetary architectures in which money is solely created by the public and lent by the central bank to the private sector. We compare them to today's fractional-reserve system in which money is created mainly by commercial banks. We use a simple general equilibrium setting and determine under which conditions these architectures yield the same welfare and stability outcomes and under which conditions they do not. We show, in particular, that the decentralized sovereign money system yields the same level of money creation and allocation of commodities as the fractional-reserve monetary system if the central bank solely pursues interest-rate policy.
Keywords: money creation; Chicago Plan; full-reserve banking; monetary architecture; monetary system; capital regulation; reserve requirement; monetary policy; price rigidities
JEL Codes: D50; E4; E5; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decentralized sovereign money system (E42) | money creation and allocation of commodities (E59) |
| central bank interest rate policy (E52) | efficiency of money allocation (D61) |
| decentralized deposit system (E42) | allocations of the fractional-reserve monetary system (E42) |
| capital requirements (G32) | excessive risk-taking (G41) |
| regulatory frameworks (G38) | financial stability (G28) |
| price rigidity (D41) | stability of banking systems (F65) |