13

This is surprisingly subtle. When, for instance, when bank A in the Richmond Federal Reserve district sends $1000 in reserves to bank B in the Minneapolis Federal Reserve district, reserves are taken out of bank A's account at the Richmond Fed and placed into bank B's account at the Minneapolis Fed. Now, bank A's reserves are a liability on the books of ...


9

High-powered money is another term for the monetary base or MB. MB represents all money created by the government. However, that is not all the only source of money. Banks are allowed to create money too. Which is why higher aggregates like M2 and M3 are greater than MB. Because bank money is greater than government money, it (and not MB) is more of a ...


7

It surely is possible: For a long while, Gold was the basis for the value of money in many "modern" countries, leaving central banks with little room for policies.


6

Double entry book keeping. If we take the example given here, of the Greek Central Bank (bank nerd trivia - interestingly the GCB is a commercial bank, listed on the Greek Stock Exchange), arbitrarily adding 000's to its deposit account. This cannot be done as stated. The double entry book keeping accounting system on which all banking is based, requires ...


6

The description you're providing of how interest works is based on a couple of fairly common misunderstandings about how the system actually works, so lets clear that up first. Fractional reserve banking and the gold smith banking systems preceding it, are a result of the development of an accounting technology called double entry book keeping in the 13th ...


6

It's a holdover from the old Gold Standards. Gold standard regulation required all banks, including the central bank to hold gold as a regulatory asset. In the last gold standard, the Bretton Woods regime, the US in particular had to hold gold to back the dollar. The requirement went away with the collapse of the Bretton Woods agreement in 1973, but the gold ...


6

Clearing for the US Banks is done through the Automated Clearinghouse System which is operated by the Fed. For transfers of central bank money, which would include transfers between reserve banks, the Federal Reserve also operates the Fedwire Funds Service which is an RTGS (Real Time Gross Settlement) system. This is similar to the Bank of England's RTGS ...


6

It makes little sense to me either, but here are some possible reasons for buying a bond with negative interest rates rather than depositing the same amount in a bank: The deposit-taking bank may go bankrupt during the lifetime of the bond and your deposit would be too large to be guaranteed, with the cost of default insurance being higher than the the ...


6

To maintain the currency peg, the Hong Kong Monetary Authority (HKMA) has to buy HKD and sell USD when the currency comes under depreciation pressure and sell HKD and buy USD when the currency comes under appreciation pressure. Depreciation pressure: The HKMA operates a currency board, which means that more than 100% of outstanding HKD is backed by USD ...


6

Balance sheets always balance, so assets equal liabilities. Imagine a commercial bank goes to the central bank and wants cash. The central bank provides the cash, but asks for some of the commercial bank's loans (or government bonds) in return. The central bank now has the loans (or government bonds) as assets and the cash as liabilities. The cash is a ...


6

The unwind depends upon what the central bank did. If the central bank did a repurchase agreement (“repo”) or lent against assets for a fixed time, the agreement automatically unwinds at the term of the deal (which is short). They would need to enter into new deals to keep their balance sheet size unchanged. If they bought the asset outright, it will either ...


6

What is QE: QE is simply an asset purchase by central bank. As explained by Fed St. Louis QE is defined as: large-scale asset purchases—in the hundreds of billions of dollars range—of, for example, mortgage-backed securities and Treasury securities. Furthermore, under QE this is done with newly created reserves. Generally these assets are actually not ...


5

Your question has been addresses in different ways. Kydland and Prescott (1977) argue that a central bank should follow defined policy rules instead of active stabilization methods because the latter contributes to economic instability. Barro and Gordon (1983) prove that under a discretionary regime, the central bank has an incentive to print money to ...


5

This quotation by Michael Bordo, Owen F Humpage, and Anna J Schwartz (2012) was the richest description I could find on how the SNB achieved the floor: In March 2008, the Swiss National Bank eased monetary policy in response to expectations of deflation, deteriorating economic conditions, financial-market distress, and a Swiss franc appreciation ...


5

@Henry gives a good answer with lots of interesting reasons. However, there are lots macro-model setting where the demand for risk free assets is positive, even when the interest on savings is negative. Essentially, because risk is unpleasant and we don't have any good alternative technology to the market for risk-less assets to move our savings through ...


5

Under most capitalism-like systems, companies are funded in two ways. One is debt with positive interest, the other is by selling equity to shareholders. If you could effectively prohibit debt, then companies could conceivably adapt by switching to a 100% equity model, in which individuals would shift all of their interest-bearing savings into shares. ...


5

You ask: "what would happen if every country in the world were to make a law that would make it illegal to lend money at a positive rate of interest?" We know what happens, because we've already seen this happen in some places. People reinvent lending for positive interest in some other guise that keeps the word of the law, but breaks the spirit of it. For ...


5

Am I correct to assume that the increase in GDP is exclusively caused by inflation? No. World GDP increases when the world produces more in one year than it did the year before. Inflation means (among other things) that prices increase. Suppose this year the world produces 10 apples valued at two dollars each. Suppose next year the world produces 11 ...


4

The key thing to note is that the interest paid does not simply accumulate at the bank. Nobody runs a business in order to just make a big pile of money to keep in a safe. The banks spend the money back into the economy through staff wages, running costs and dividend payments to shareholders. All these outflows of money will ultimately be spent on real goods ...


4

Repayment of interest does require an expansion of the money supply, but not in a way that is inflationary. Consider first the way that commercial banks make loans. The whole purpose of loans is to borrow against future output— so if you imagine a firm that wants to purchase a machine that will allow it to produce more stuff— and thus have greater future ...


4

From the Economist: The SNB suddenly dropped the cap last week for several reasons. First, many Swiss are angry that the SNB has built up such large foreign-exchange reserves. Printing all those francs, they say, will eventually lead to hyperinflation. Those fears are probably unfounded: Swiss inflation is too low, not too high. But it is a hot political ...


4

Just to synthesize the other two answers together a bit and "join-the-dots". Setting the Scene Since 2011 SNB had decided that it wanted to prevent the CHF from strengthening past 1.2 CHF per EUR. In order to do this it had to do either or both of: Discourage people from buying CHF. One way to try do this is to keep rates low. Sell CHF by the bucket ...


4

I guess it is for the same reason that other countries hold foreign reserves. The argument is that for some reason foreign markets become suddenly very adverse to take your currency, you should have some other medium of exchange that allow you to finance imports or serve short term external debt. This is very related to the Guidotti–Greenspan rule.


4

This question as is (October 2, 2015, 15:07 Athens time) should be closed and I voted to that effect. I provide an answer in order to show why it should be closed. As any natural or legal entity, the "Fed" engages in strategic behavior. Strategic behavior is not a priori constrained by moral considerations (and this is why Game Theory has come under fire ...


4

Most central banks do not provide guarantees on their currency to the public. In fact it can be argued that historically they were never fully guaranteed as most central banks issued more receipts for gold (or other assets) than they had, so the receipts were never fully redeemable in the aggregate. The American Fed was stressed during the great ...


4

The independence of the central bank means that the bank is independent of the government. A mandate of the central bank is to ensure price stability. However any excess cash the bank prints is the property of the government. The government enjoys having extra income and were it allowed to exercise direct control it may push the bank to print more money. ...


4

Your understanding is wrong. Nations accrue debt by selling bonds. They pay interest on those bonds to the bond-holders.


4

This is veering into the direction of an opinion-based answer, but I would argue that there is no particular evidence that the Fed “needs” to reduce the size of its balance sheet. If the Fed wanted to revert to its pre-2008 mode of operations - where interest is not paid on reserves - it would be required to reduce its balance sheet so that there are no ...


3

Mechanically speaking, there are two functions that have to be centralised, although the second one need not be performed by the central bank historically it usually is. There is an absolute requirement for a guaranteed lender of last resort, since banks can run into liquidity issues through no fault of their own. Liquidity in this context, is the ...


3

Note: This answer was posted 4 months before the OP clarified what it really wanted to ask (see comments below the answer). I will accept @Ubiquitous view of the question, which in summary is: Why not having a publicly owned monopoly in the banking sector? Instead of a, however regulated, private banking sector? It would be naive to counter "then why ...


Only top voted, non community-wiki answers of a minimum length are eligible