How Money Is Created in a Modern Economy

There is much confusion among both academics and policy-makers as to how money is created and the avenues through which it flows into the wider economy. This chapter sets out the process through which new money is created, including looking at which central banks have written accurately about these processes and, conversely, some of the economics textbooks which have described erroneous models of the monetary system. Additionally, this chapter examines how the Basel regulations impact money creation and whether the so-called Shadow Banking System enables money creation in similar ways to commercial banking.