How does the European Central Bank create money?
The ECB has a special bank account.The numbers in said bank account are changeble on demand. You make the number higher and - hey presto! - you have more euros (magic I tell ya, magic!).Use the newly minted euros and lend them out (to banks) at lower rates to increase lending activity and pump money flow through a moribund economy. They do this by buying the short term commercial paper (the interest bearing bank bonds) of large banks, driving down the bank's lending costs and cost of capital. This causes banks to lend out more as they can now do so more profitably in more situations.More lending increases business formation, personal consumption, family creation and housing demand. These are multiplicative effects as they feed on each other. All this drives up consumer consumption - the main factor needed to grow an economy (personal consumption is 70% of world GDP - or so I'm told).Use said euros to also buy back government debt driving their prices up and bond yields down. People then sell said bonds because the yields fall and invest instead in assets that have better returns on invested capital (stocks/housing/consumption). This leads to the same consequences as stated above.And that my friend is expansionary monetary policy or quantitative easing.Mind the inflation!
What if central bank don't get the allowance to create money?
There are two important roles of the CB that are compromised with inability to create money.First is monetary policy. If the CB cannot issue money it cannot lend to commercial banks and hence cannot influence market interest rates.Second is the lender of last resort. If commercial banks find themselves in trouble they can borrow from the CB even if market shuts them off. Without CB backstop banking system would be more fragile and prone to panics, just as it was in XIX century.Those roles are coincidentally two most important ones for a CB, and a reason for CBs to be created. Essentially CB w/o money issuance is not a CB any more, but a glorified bank sector supervisor.
To what extent could central bank control high-powered money?
Completely.High-powered money, also known as MB, is a creation of the central bank. The central bank creates MB when they buy bonds from the private sector, and they extinguish MB when they sell bonds to the private sector. This is basically how the Fed effects monetary policy (or it was, before QE).
How do banks make money?
There are two key observations to understand their profitability:1. Their loan interest rate is typically higher than their deposit interest rate. For example, for a current home loan in the the United States, the interest rate is approximately 4.5%, while the amount they pay on a savings account is approximately 1%. On a $300,000 loan, the difference per annum is therefore $10,500. That's $10,500 of profit, which is considerable. 2. For every dollar you put in to the bank, they can lend out more than just the deposit amount. They do not need to hold all the assets as liquid, because the theory goes, not everyone will ask for their money from the bank back at the same time. This is the basis of the Fractional reserve banking system. In other words, if I give the bank $10,000, does that mean it can issue $10,000 in loans? No. Because it's only expecting 20% of people to make a withdrawal on their money, they can actually lend out $50,000 because people trust the bank to be able to pay them back. This 20% is called the Reserve requirement, and its inverse (5x) is called the Money multiplier. As a personal aside, both of these seem very undesirable to me. The first issue means that the rich get richer without risk or effort; the second is a form of deception and can lead to major economic instability in turmoil (known as a Bank run) when people realize that the bank won't be able to meet its requirements (as happened during the Great Depression):
A central bank seems to generate profit by emitting currency? How does this work?
The primary aim of central bank is not to earn Profit. Central banks such as Federal Reserve , Reserve Bank of India and Bank of England the Bankers to their respective Governements. They provide government with the required money . Following can be the roles of a central Bank:Minting Money , the central banks of country are responsible for minting currency and they decide how much money is to be minted. They keep revord of the amount of money that is flowing in the economy.Monitoring the Monetary Policy: most of the central banks decide the monetary policy based on the level of inflation in economy. In case of high inflation they reduce the money supply and in case of deflation they increase the money supply.They also set the “benchmark” intrest rates for lending and borrowing as indirect measure of control of inflation.They set the Limits on Other banks as to how much credit they can offer based on their capital reserves and also directs the banks to keep reserves to manage the liquidity in system.Central banks issue Banking licenses to other private and public sector baks which act as banker to general Public and companies. They also act as banking regulators.When the country seeks international loans , central banks act as facilitator and provide collaterals if any.They earn some profit from lending the public sector and private banks. Their primary role is to act as banker to central government and minting money.
How do banks create money out of thin air?
There are already a few answers to this question, and a quick search on Quora would have revealed those answers.Banks can’t create money.What they do is follow what is known as the fractional reserve model : they take in deposits from clients for which they pay interest to the depositor, and from these deposits they lend out a percentage of the deposits to other clients at a higher rate than what they pay for deposits. They would furthermore raise money on the capital markets for client loans.Banks cannot write as much credit as they wish without having money to back this up: the answer is obvious. When a bank grants a client a loan, they need to disburse that loan to an account of the client so that the client has access to it. The loan is not generated “out of thin air” - it’s real, genuine money. It’s just not always “the banks’ money” …