Money creation

Money creation, or money issuance, is the process by which the money supply of a country, or of an economic or monetary region,[note 1] is increased. In most modern economies, most of the money supply is in the form of bank deposits.[1] Central banks monitor the amount of money in the economy by measuring monetary aggregates (termed broad money), consisting of cash and bank deposits. Money creation occurs when the quantity of monetary aggregates increase.[note 2]

Money issued by central banks is termed base money. Central banks can increase the quantity of base money directly, by engaging in open market operations. Bank loans issued by commercial banks that practice fractional reserve banking expands the quantity of broad money to more than the original amount of base money issued by the central bank. Governmental authorities, including central banks and other bank regulators, can use policies such as reserve requirements and capital adequacy ratios to limit the amount of broad money created by commercial banks.