It has been suggested in some comments of another question that the well known paper Money Creation in the Modern Economy is no longer fully correct. What aspects of the paper would need to be modified in the light of regulatory changes made since it was published in 2014.

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    $\begingroup$ I think it's still very relevant. It states that "reserve requirements are not an important aspect of monetary policy frameworks in most advanced economies today" and that "Bank of England currently has no formal reserve requirements". $\endgroup$
    – AKdemy
    Commented Mar 14, 2023 at 21:08
  • $\begingroup$ It doesn't mention a bunch of important details like the LCR, which became a minimum requirement for BCBS member countries on 1 January 2015. In Europe, you would need to know what TLTROs are to properly understand how the current banking system operates. Ultimately, that's all details that don't change the big picture though. $\endgroup$
    – AKdemy
    Commented Mar 14, 2023 at 21:14

1 Answer 1


Sections that would have to be modified significant (I ignored all small changes) way are:

  • Section: Money creation in reality. To be more specific paragraphs 3-5 (which is 60% of that sub-chapter). Also, the figure 2 and related explanation is now not accurate.

Reason why: Reserve requirements were abolished (see Fed). So those figures and explanation there is quite inaccurate nowadays (note although UK did not had official reserve requirement at that time the paper does not write about UK solely but about the system in general making repeated references to US). As a consequence the explanations there simply don't hold up anymore.

  • Section: Managing the risks associated with making loans. This section would need substantial rewriting as now the way how liquidity risk has to be managed was more institutionalized and reworked e.g. see Fed for some list of changes, more emphasis was put on liquidity requirements than before (At least in US and EU UK perhaps has the same system as it used to have).

In addition, the paper is missing some serious and quite fundamental changes:

  • In EU we now have so called 'floor system' adopted in 2015 and use of TLTROs. Now of course nobody can blame authors not to be prescient but any paper that does not discuss this is simply seriously outdated as it was quite significant change. You can read more about this in this ECB report (in fact in a comment OP asked me if I have better paper than McLeay - I do not have a general one but for EU specifically this paper is much much better).

  • Increased use of liquidity coverage ratio to create and manage demand for reserves (again you can have look at the Åberg et al 2021 paper which is Eurocentric but applies to US as well).

This are pretty serious omissions. Again by no fault of McLeay and coauthors, but it is simply impossible to claim that the paper still provides accurate representation of modern monetary system, same way as 1989 political map would no longer accurately describe reality as borders changed significantly in multiple places.

Of course, the paper still has some value:

  • Point about multiplier model not being good approximation for post 2009 banking is valid

  • whole chapter about QE is still more or less fine (even though even the way how QE is done changed, but not that substantively).

  • the point about central banks controlling lending through monetary policy is still valid

  • same about the point about interest rate targeting

  • the (implicit) arguments for endogenous money supply

So the paper has still some valid points (in fact I teach macroeconomics class and I use this paper as required reading for my students). However, claiming that the paper offers accurate or 99% accurate description of how current monetary system works is indefensible. It makes some good broad points, but it simply no longer accurately describes how banking system operates, especially in lieu of the recent strong shift toward focus on liquidity. The paper can be useful as a stepping stone in understanding current monetary system, provided that person who uses it actually lets people/students know about significant changes, but on its own it is no longer sufficient.

  • $\begingroup$ Perhaps I am misreading the article, but it was written at a time when there were no reserve requirements in the UK and when commercial banks in the USA had far more reserves held at the Fed than they were obliged to hold. So in both cases the issue about reserves was not that they were a constraint on money creation, but instead a transfer between commercial banks (neither increasing nor decreasing in aggregate) when one of their customers sent money to another. I thought that was still the case. Europe had issues with negative interest rates which needed other arrangements. $\endgroup$
    – Henry
    Commented Mar 16, 2023 at 8:29
  • $\begingroup$ @Henry the problem is that now not only there are excess reserves but there are no reserve requirements at all, so it is all done through managing banks liquidity. However, since banks are forced to have certain level liquidity (either cash, or bonds) this constraints the money creation. This is biding constraint since there isnt infinite liquidity in the market. The problem is that the figures in the paper that still use reserves (even if UK did not had RR, again the paper meant to be general) no loner make sense in this system. Of course without reserves its trivially true reserves are not $\endgroup$
    – 1muflon1
    Commented Mar 16, 2023 at 13:29
  • $\begingroup$ constraint, but that is completely moot point because there are other mechanisms that do constrain the system in different way completely ignored by the paper $\endgroup$
    – 1muflon1
    Commented Mar 16, 2023 at 13:31

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