Intermediation and pure liquidity creation in banking systems

BIS Working Papers No 5
February 1981

This paper divides money created by banking systems into two separate components, corresponding to a classification of the services provided by banking systems. The model of division into the amounts of intermediation and pure liquidity creation has some implications that are different from those of other models of the demand for money. In particular, the paper finds no evidence of a strong or stable relationship between the demand for bank money and income, and between the demand for money and interest rates. Further, it is suggested that owned deposits arising from intermediation have greater inflationary or anti-inflationary potential than borrowed deposits arising from pure liquidity creation.