Credit creation

Money creation (also known as credit creation) is the process by which the money supply of a country or a monetary region (such as the Eurozone) is added to. A central bank may introduce new money into the economy (termed "expansionary monetary policy") by purchasing financial assets or lending money to financial institutions. However, in most countries today, most of the money supply is in the form of bank deposits, which is created by private banks in a fractional reserve banking system. Bank lending increases the amount of broad money beyond the amount of base money originally created by the central bank. Reserve requirements, capital adequacy ratios, and other policies are used by the central bank to limit this process.

Central banks monitor the amount of money in the economy by measuring monetary aggregates such as M2. The effect of monetary policy on the money supply is indicated by comparing these measurements on various dates. For example, in the United States, money supply measured as M2 grew from $6.407 trillion in January 2005, to $8.319 trillion in January 2009.

Monetary policy regulates a country's money supply, the amount of broad currency in circulation. Almost all modern nations have central banks such as the United States Federal Reserve System, the European Central Bank (ECB), and the People's Bank of China for conducting monetary policy. Charged with the smooth functioning of the money supply and financial markets, these institutions are generally independent of the government executive.

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