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This article develops a model that speaks to the goals and methods of financial stability policies. There are three main points. First, from a normative perspective, the model defines the fundamental market failure to be addressed, namely, that unregulated private money creation can lead to an externality in which intermediaries issue too much short-term debt and leave the system excessively vulnerable to costly financial crises. Second, it shows how in a simple economy where commercial banks are the only lenders, conventional monetary policy tools such as open-market operations can be used to regulate this externality, whereas in more advanced economies it may be helpful to supplement monetary policy with other measures. Third, from a positive perspective, the model provides an account of how monetary policy can influence bank lending and real activity, even in a world where prices adjust frictionlessly and there are other transactions media besides bank-created money that are outside the control of the central bank.

Financial upheaval and unconventional monetary policies have made money a salient political issue. This provides a rare opportunity to study the under-appreciated role of monetary trust in the politics of central bank legitimacy which, for the first time in decades, appears fragile. While research on central bank communication with 'the markets' abounds, little is known about if and how central bankers speak to 'the people.' A closer look at the issue immediately reveals a paradox: while a central bank's legitimacy hinges on it being perceived as acting in line with the dominant folk theory of money, this theory accords poorly with how money actually works. How central banks cope with this ambiguity depends on the monetary situation. Using the Bundesbank and the European Central Bank as examples, this article shows that under inflationary macroeconomic conditions, central bankers willingly nourished the folk-theoretical notion of money as a quantity under the direct control of the central bank. By contrast, the Bank of England's recent refutation of the folk theory of money suggests that deflationary pressures and rapid monetary expansion have fundamentally altered the politics of monetary trust and central bank legitimacy.

Objectives: This study aims to identify and analyse the forms of infringement on the sovereign right of public authority in the issuance and management of currency, particularly in the context of the fractional reserve banking system and the technological advancements facilitated by globalisation, which have enabled the creation and promotion of virtual currencies. Methodology: The study adopts a composite method that combines historical induction and logical reasoning to explore the forms of infringement on the general jurisdiction of the authority associated with both traditional and emerging forms of currency. Findings: The study concludes that safeguarding public authority's exclusive and disinterested right in currency issuance and management is a priority in Islamic legal policy. Such necessitates caution against forms of infringement that violate this right due to their impact on the fairness and efficiency of the monetary system. Originality: This research's originality lies in its characterisation of the generation of credit money and the issuance or mining of virtual currencies as contemporary forms of infringement on the authority's general jurisdiction, akin to the counterfeiting of paper money.

PurposeThis paper aims to investigate the relationship between money creation process and banking performance for Tunisian listed banks, particularly in the context of increased economic policy uncertainty.Design/methodology/approachIn the relevant literature, there are two theories of money creation. The theory of money creation out of nothing, by using the central bank for refinancing and the theory of financial intermediation, from which money creation is made from preexisting savings. In this paper, the authors utilize a panel data for a sample composed of 11 Tunisian banks during the period of study from 1999 to 2019.FindingsThe study’s empirical analysis show that both forms of money creation have a positive impact on bank profitability as measured by the return on assets (ROA) and return on equity (ROE) ratios. However, the same analysis shows that the channel of money creation out of nothing is the most profitable for banks. Also, the authors show that economic policy uncertainty negatively influences the relationship between money creation and banking profitability only when credit creation is derived from savings.Originality/valueThis paper contributes to the literature by explaining the nexus between money creation and Tunisian banking performance which depends on the implementation of stable and conducive economic and political environment. Also, this link requires the implementation of monetary measures to encourage savings and develop an efficient capital market and judicious monetary policy enabling the central bank to inject more liquidity into the economy.

Quantum money represents an innovative approach to currency by encoding economic value within the quantum states of physical systems, utilizing the principles of quantum mechanics to enhance security, integrity, and transferability. This perspective article explores the definition and properties of quantum money. We analyze the process of transferring quantum money via quantum teleportation, using terrestrial and satellite-based quantum networks. Furthermore, we consider the impact of quantum money on the modern banking system, particularly in money creation. Finally, we conduct an analysis to assess the strengths and weaknesses of quantum money, as well as opportunities and threats associated with this emerging concept.

The endogenous money creation paradigm posits that banks generate money through lending, with deposits serving as a byproduct. This study investigates the mechanism driving the “credit–deposit paradox” during Poland’s high-interest-rate environment, introducing innovative methodological approaches to quantify systemic monetary impairment. Using comprehensive monthly data from 2006 to 2024, we employ a mixed-methods framework featuring: (1) Bayesian vector autoregression with Minnesota priors to test dynamic interdependencies; (2) a novel money shortage indicator (MSI) that operationalizes credit–deposit decoupling through three theoretically grounded components; (3) Markov regime-switching analysis to identify persistent monetary stress regimes. Key findings reveal a structural decoupling between deposit growth and credit creation, with robust evidence that exogenous money inflows accumulate as idle deposits rather than stimulating lending. The economy experienced significant periods of money shortage conditions, with the most severe impairment occurring during recent high-stress periods. The analysis confirms the dominance of cost-push inflation from energy and food prices, while monetary factors played a limited role. High interest rates amplified credit demand suppression, creating conditions consistent with endogenous money creation disruption. Methodologically, this study enables three key advances: (1) systematic measurement of monetary transmission breakdowns; (2) empirical identification of structural factors disrupting credit–deposit dynamics; (3) temporal characterization of monetary stress persistence patterns. These contributions advance the endogenous money framework by demonstrating its vulnerability to behavioral, policy-induced, and exogenous disruptions during high-stress periods. Practically, the MSI offers policymakers a real-time diagnostic tool for identifying monetary transmission breakdowns, while the regime analysis informs targeted countercyclical measures. Specific policy recommendations include developing sector-specific liquidity facilities, coordinating fiscal transfers with monetary policy to prevent deposit–loan decoupling, and prioritizing supply-side interventions during cost-push inflation episodes. By integrating post-Keynesian theory with empirical evidence from Poland, this study contributes to understanding money creation mechanisms in highly stressed economic environments.

Mainstream theories have not sufficiently explored the organic connection between fiscal and monetary systems. The requirement to establish a modern fiscal, tax, and financial system necessitates a more profound understanding of the interrelated effects between fiscal and monetary systems. This paper, based on a comprehensive analytical framework for fiscal influence on the monetary system, explores the institutional foundation, transmission channels, and regulatory capabilities through which the fiscal authorities affect monetary circulation. There are three findings. First, the Treasury Single Account (TSA) system, the capital contributor responsibility system with the fiscal authorities fulfilling responsibilities as the capital contributor for state-owned commercial banks, and the fiscal credit system endow fiscal authorities with the ability to influence money creation. Second, fiscal authorities exert a significant influence on the monetary market: With regard to money supply, treasury deposits are a vital factor influencing the broad money, and the impact of treasury deposits on money supply exhibits significant cyclical characteristics; And in terms of public financial product production, over the past decade, the proportion of fiscal credit relative to commercial credit has been on the rise, with 11.04% to 31.29% of loans from financial institutions in 2022 categorized as fiscal credit. Third, relevant authorities have employed open market operations to counteract disturbances from treasury revenues and expenditures, have utilized structural monetary policy tools in conjunction with fiscal production of public financial products, expanded government bond space through the characteristics of state-owned financial capital as a fiscal contributor, and supported the central bank’s macro-prudential management through their role as the capital contributor for state-owned commercial banks.

Purpose Bank lending is the major source of monetary expansion. Bank-led money creation is a key issue in both conventional and Islamic financial systems. The purpose of this paper is to examine the issues related to Islamic banking money creation. In this conceptual paper, the authors investigate the involvement of profit and loss sharing (PLS) in money creation and especially how can PLS limit money creation “out of nothing.” In this regard, the authors examine the potential of the PLS principle in tackling the excessive money creation phenomenon. Design/methodology/approach This study uses a normative approach regarding Islamic bank money creation that fits Sharia directives. In fact, this study discusses “what ought to be,” that is, the values and norms of PLS money creation that impede excessive money creation. Findings Overall, Islamic banks create money differently compared to conventional ones. Especially, by avoiding a purely financial intermediary, money creation under the PLS principle sustains a strong relationship with the real economy and leads to a lower money multiplier. Therefore, PLS mechanisms allow financing through real assets and not credit assets “out of nothing.” This could prevent excessive money creation from causing harmful effects on indebtedness and financial instability. Practical implications PLS offers a valuable resolution for banking system money creation through the optimization of Islamic bank financing by facilitating the separation of the monetary function from the credit one. This reform thought reinforces the stability value of money allowing it to fully perform its functions with reference to the directives of Sharia. This especially allows the integrity and purchasing power of money, the reduction of the gap between the evolution of both real and financial economies and, consequently, the indebtedness and crisis. It is recommended to promote PLS financing by reforming institutional and regulatory constraints. Originality/value This study addresses the contemporary issue of money creation by Islamic banks through the PLS approach. The conceptual framework of this paper highlights the reformist role of PLS in limiting money creation through Mudarabah approach within fractional reserve banking.

In this paper we set out a three-pillar monetary-financial framework to (i) analyze, categorize and compare past, current and emerging means of payment; to (ii) capture their creation and destruction processes through sectoral balance sheet dynamics; and to (iii) identify the inherent risks to the current monetary-financial system, also known as the fractional reserve banking system. These risks, which stem from sudden shifts in money demand and supply, are as follows: (I) risk of a cashless society; (II) risk of structural bank disintermediation; (III) risk of systemic bank runs; (IV) risk of currency substitution; and (V) risk of economic and financial bubbles. This framework will guide the assessment of the central bank digital currencies (CBDC), which are considered as the next step in monetary evolution. We will analyze two large groups of CBDC proposals: (i) proposals aimed at complementing cash and bank deposits; and (ii) proposals aimed at replacing all bank deposits with CBDCs. We find that once CBDCs are issued in both sets of proposals, there is always a trade-off between low levels of (I), (IV), (V), risks and high levels of (II) risk. This trade-off could also be defined as the CBDC dilemma, which states that in most CBDC proposals it is impossible to have both of the following at the same time: (1) low levels of (I), (IV) and (V) risks; and (2) low levels of (II) risk. Finally, we suggest that further research on CBDCs should focus on the second group of proposals on a phase-in basis in order to also mitigate the structural bank disintermediation risk and hence to overcome the CBDC dilemma.

This paper presents a model in which safe assets are systemic because they are the medium of exchange in risky assets. It connects the literature from banking and finance on safe assets to the monetary literature on alternative monetary systems involving commodity money, interest bearing money, and private money creation. Because safe assets have intrinsic value, changes in their supply lead to changes in market efficiency. Additionally, because safe assets are costly to produce, there is overproduction of safe assets relative to the social optimum. When the model is calibrated to plausible liquidity premiums the resulting inefficiencies are not large.