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Money creation in New Zealand

This article describes the monetary base, explains how broad money is created through the bank lending process, and explains the constraints on broad money creation.

John Knowles, Laura Austin, Lewis Kerr

Introduction

Money plays an essential role in the economy. It allows people to store value over time, exchange with each other, and measure the relative value of things. The Reserve Bank of New Zealand is responsible for maintaining people’s trust in money. Trust and credibility are central to the idea of money, without which, the economy could not run smoothly and people would be much worse off. We try to keep the purchasing power of money steady by keeping consumer price inflation low and stable.

There are several forms of money. Some are created by us directly, and others are created by commercial banks via interactions with their customers. 

Money created by the Reserve Bank directly is known as the monetary base, base money or M0. The monetary base includes:

Settlement cash balances are deposits held by commercial banks in their accounts at the Reserve Bank.

However, the monetary base is small relative to the total money supply. The money most people use in their daily lives is known as broad money or M2. Bank deposits make up about 98% of broad money in the New Zealand economy.

This Bulletin article describes the monetary base, explains how broad money is created through the bank lending process, and explains the constraints on broad money creation. 

 

About the Bulletin

The Reserve Bank Bulletin canvasses a wide range of issues related to central banking, the financial system and the New Zealand economy.

Our role in money and payments is multi-faceted. First, we oversee, operate, regulate, and supervise core payment systems. Secondly, as a steward of money and cash our responsibilities lie not only in the issuance of central bank money but also in the roles that it performs. Through these systems, New Zealanders are able to save and spend their money, manage risks, and together grow the economy and make life better.

This Bulletin goes into more detail on the mechanics of how money is created and by whom.

It also explains how the money supply fits in with monetary policy, our key role to control inflation and support employment.