Abstract
AbstractThis chapter develops further the role of a central bank and its interplay with commercial banks. Together, the two ensure the provision of liquidity to the economy, such that the real sectors are shielded from flows of funds originating from household and investors. We also disaggregate the banking system into two banks to represent deposit flows between banks and their impact on the central bank’s balance sheet, and to distinguish between what we call “relative” and “absolute” central bank intermediation. We then integrate deposit money creation by commercial banks into our system of financial accounts, and revisit some old debates, such as the limits of bank money creation and the role of related parameters that the central bank can set (not only the reserve requirement ratio, but also the collateral framework). Finally, we explain the concepts of “plain money” and “full reserve banking” within the financial accounts, and also discuss in this framework the recent proposals regarding central bank digital currency (CBDC).
Highlights
It distinguishes between financial equity and real equity
It avoids the redundancy inherent in financial accounts shown in balance sheet format as it shows every financial position only once in a matrix, and not twice, i.e. not separately as a financial claim and as a financial liability
Besides the matrix of financial claims and liabilities, there is one column showing all the real assets of the sectors and one row showing the real equity positions of the sectors, i.e. the equity not being a liability to any other sector
Summary
This chapter develops further the role of a central bank and its interplay with commercial banks. We disaggregate the banking system into two banks to represent deposit flows between banks and their impact on the central bank’s balance sheet, and to distinguish between what we call “relative” and “absolute” central bank intermediation. We integrate deposit money creation by commercial banks into our system of financial accounts, and revisit some old debates, such as the limits of bank money creation and the role of related parameters that the central bank can set ( the reserve requirement ratio, and the collateral framework). We explain the concepts of “plain money” and “full reserve banking” within the financial accounts, and discuss in this framework the recent proposals regarding central bank digital currency (CBDC)
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