Money Creation

Money is the currency in circulation plus demand deposit. Money was created by creating currency or printing paper currency. However, this is the traditional method. Nowadays, majority of countries in the world including Malayasia are implementing monetary policy to create money and controlling the money supply.

Money creation process is controlled by the Federal Reserve System or Central Bank. The Central Bank in Malaysia known as Bank Negara Malaysia. Money creation process also involve three main actors which are Federal Reserve Bank (BNM), households and banks.

There are three primary instrument for implementing monetary policy which are Open Market Operations, Reserve Requirements and Discount Rate. These instruments will affect the quantity of money and credit in the economy.

Central Bank buys and sales the government securities through its Open Market Operations. By purchasing securities, the government has increased the money supply and also has increased the amount of reserves in the banking system that are available for lending and multiple deposit creation.

Next, by using Statutory Reserve Requirements, banks required to deposit funds, based on a fixed percentage of deposit liabilities at the Central Bank. When the percentage of Statutory Reserve Requirements are increase, the quantity of money and credit in the economy will decrease and vice versa.

Lastly, Discount Rate refers to a discount loans and the rate charge by the Central Bank
to financial institution. When the Central Bank wants to increase money supply and credit, it can decrease the Discount Rate and vice versa.