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

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Summary

Chapter 2

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)

Central Banks in a Paper Standard
Changes to the Demand of Financial Assets in a Paper Standard
Corporates
If Financial Sectors not Ready to Compensate Missing Demand for Securities
Commercial Banks Absorb Security Flow
The Central Bank Absorb Flows and Acts as Market Maker of Last Resort
Interbank Flows
Interbank
Credit Money Created by Banks
Savings and sight deposits of HH
Deposits Hh
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