# How do central banks create money to pay interest on reserves

Referring to this answer (https://economics.stackexchange.com/a/15321/12013) for the technical process of money creation.

How do central banks create the money to pay interest on its reserves (assuming positive interest rate)? I don't see the process being backed by any asset. And if the money is fiat-ly created with no asset backing, would raising interest rate not have the opposite effect of driving inflation and devaluing the currency (rather than slowing inflation and appreciation)?

Yes I am aware of the PQ=MV formula of conventional central bank wisdom, that raising interest rate has the effect of restricting money supply and slowing inflation. I would like to know if the factor mentioned above exists, and if yes, when will each factor/force dominate net inflation and exchange rate.

Since there are many types of interests, the answer can be limited to IOER or this.

If the central bank wants to pay $1 in interest to a depositor, it: • increases the amount on deposit by \$1 and
• reduces the central bank's equity by $1. That is, it just reshuffles the right hand side of the central bank's balance sheet; the asset side is unchanged. (On the income statement, there is a correpsonding$1 interest expense.)