Money creation
[2] The monetary authority of a nation—typically its central bank—influences the economy by creating and destroying liabilities on its balance sheet with the intent to change the supply of money available for conducting transactions and generating income.
In most developed countries, central banks conduct their monetary policy within an inflation targeting framework,[8] whereas the monetary policies of most developing countries' central banks target some kind of a fixed exchange rate system.
The term "money supply" commonly denotes the total, safe, financial assets that households and businesses can use to make payments or to hold as short-term investment.
[11] The money supply is measured using the so-called "monetary aggregates", defined based on their respective level of liquidity.
Various measures are taken to prevent counterfeiting, including the use of serial numbers on banknotes and the minting of coinage using an alloy at or above its face value.
[3] Debt monetization is a term used to describe central bank money creation for use by government fiscal authorities, like the U.S. Treasury.
Historically, in a fixed exchanged rate financial system, central bank money creation directly for government spending by the fiscal authority was prohibited by law in many countries.
[14] However, in modern financial systems central banks and fiscal authorities work closely together to manage interest rates and economic stability.
This involves the creation and destruction of deposits on the central bank ledger to ensure transactions can settle such that short term interest rates don't exceed specified targets.
In the Eurozone, Article 123 of the Lisbon Treaty explicitly prohibits the European Central Bank from financing public institutions and state governments.
For example, in the United States, when the Federal Reserve permanently purchases a security, the office responsible for implementing purchases and sales (The New York Fed's Open Market Trading Desk) buys eligible securities from primary dealers at prices determined in a competitive auction.
Because accounting conventions define the value of any given asset or liability, bank capital is a subjective measure which many argue is open to manipulation and may be a poor method for regulating money creation.
The constraining factor on bank lending recognized today is largely the number of available borrowers willing to create loan contracts.
[23][24] Most central banks in developed countries, however, have ceased to rely on this theory and stopped shaping their monetary policy through required reserves.
[3] David Romer notes in his graduate textbook "Advanced Macroeconomics" that it is difficult for central banks to control broad monetary aggregates like M2.
[25]: 607–608 Monetarist theory, which was prominent during the 1970s and 1980s, argued that the central bank should concentrate on controlling the money supply through its monetary operations.
[26] The strategy did not work well for the central banks like the Federal Reserve who tried it, however, and it was abandoned after some years, central banks turning to steer interest rates to obtain their monetary policy goals rather than holding the quantity of base money fixed in order to steer money growth.
