Banks do not create money out of thin air

a column by Pontus Rendahl and Lukas B. Freund for VOX: CEPR’s Policy Portal

In recent years, some have claimed that banks create money ‘ex nihilo’.

This column explains that banks do not create money out of thin air.

From an economic viewpoint, commercial banks create private money by transforming an illiquid asset (the borrower’s future ability to repay) into a liquid one (bank deposits); they would quickly be insolvent otherwise. In addition to bank solvency representing a constraint on private money creation, banks require access to liquid reserves in order to be able to engage in money creation.

Continue reading

The preferred creditor puzzle in sovereign debt markets

a column by Tito Cordella and Andrew Powell for VOX: CEPR’s Policy Portal

Countries almost always repay loans from the IMF and the World Bank before others, even though this preferred treatment rarely appears in legal contracts.

This column presents a framework to investigate this puzzle. It argues that the ability to restrict lending allows international financial institutions to lend at the risk-free rate and creates incentives for repayment. IMF and World Bank loans are thus complementary to commercial lending.

Continue reading

Hazel’s comment:
I think I understand the issues involved a lot better now than I did before reading this.

---