A Graphical Approach
for the Money Creation Process


Oliver Nikutowski, Krisna Haryantho and Robert K. von Weizsäcker

Chair of Economics
Technische Universität München


online applet
download standalone version
download paper (PDF)


Too abstract for an abstract.


This is not about get rich fast.

The Money Creation Process

This is where the money is :)

The Applet

The applet illustrates the money creation model as explained above. There are four modifiable parameters: c, k, r and B. Each combination of these parameters makes up a scenario. This scenario will then be fed into the model. Every scenario start with the initial state and iterates from there through steps all the way to the equilibrium. From the initial state you can iterate to step 1 by clicking the PIC button. Clicking this button again will take you to step 2, 3, and so on until the equilibrium is approximately reached. Here we define periods as the even steps. Since steps always begin with 1, step 2 is period 1 (t1), step 4 is period 2 (t2), an so on. The iteration will go on as long as the scenario has not yet reached the approximate equilibrium. Depending on its parameter combination, a scenario can have a very short iteration (small number of steps, e.g. very small cand rvalues) or a very long iteration (long number of steps, e.g. large cand rvalues).

The applet consists of two view panels and a control panel. The two view panels are positioned next to each other at the upper part of the applet. The control panel is positioned at the lower part of the applet. Each of the view panels has six tabs. You can select any tab you want from the left and the right view panel. The control element panel is used to manipulate the parameter for the model and/or to change the display setting of the views. The applet will enable only the relevant control element panel items depending on which tabs you are currently viewing.

View Panel

  1. Equilibrium. Here you can see the main graphical view of the money creation model. There are nine curves in this graph. Each of these curves can be hidden or shown by clicking the corresponding check-box. The check-boxes are labeled based on the curve name.
  2. Growth. Here you can view the growth of the variables M1, D, C, R, and C + R over time. Just like the equilibrium panel, you can select which curves you want to view by clicking on the corresponding check-box. Note that these are the same check-boxes used to hide/show the curves equilibrium panel. Each variable has two curves: one is showing the growth after each step, the other one after each period.
  3. Balance Sheet. The balance sheet shows the money transfer between banks and households during the dynamic process. Hover the mouse cursor over the red lines will display a tooltip with explanation on the money transfer at that step.
  4. Table. The table view gives you a detailed record of all parameter value in every step/ period.
  5. Liquidity Market. In this view you can see how money supply relates to the money demand. You can activate the Comparative Statics option by checking the check-box labeled "Comparative statics". When this option is activated, the sliders cand rwill be enabled. Changing cand rwill shift the money demand curve and thus resulting in a new equilibrium. The resulting new curve is drawn in red.
  6. Empiric. This tab shows historical values of money parameters for the US from the year 1956-2012. The values are recorded at monthly basis. You can zoom in and out the graph by using the mouse wheel. You can also select an area on the graph by clicking and holding the left mouse button. The area you selected will be zoomed in. To return the default view, simply hold the left mouse button, move the mouse cursor to the left/up and then release the mouse button. Clicking on the legend items will show/hide the corresponding curve. Note that this tab has no direct correlation to the money creation model of the applet. Changing the parameters will not have any effects on this tab.

Control Panel

The control panel contains set of check-boxes, sliders, text fields, radio buttons and buttons, which are grouped in to sections based on the view elements they are providing options for. These sections are:

  1. Graph View Options. There are 11 check-boxes for showing/hiding the curves. Note that this will have effect on the Equilibrium view and the Growth view. (Button all) selects all check-boxes, (Button none) deselects all check-boxes. Further view options are:
  2. Growth. This option is only enabled if Growth view is selected. Here you can select whether to display the curves step-wise, period-wise, or both. When step-wise view is selected, the curves will be redrawn at each step. When period-wise view is selected, the curves will be redrawn every two steps (one period). Selecting both will activate both the step-wise view and the period-wise view. Note that this may result in a very confusing graph. The check-box “”
  3. Parameters. Here you can change the scenario for the money creation model (i.e. combination of the parameters c, k, r and B). There are two ways to do this. The simplest one is to adjust the slider to the desired value. The other one is to type the new value in the text field next to the slider. Note that c and k are related to each other based on the equation k = cc+1. Changing the value of c will automatically update the value of k and vice versa. For simplicity reason, the applet only allows a maximum value of 50 for c. Changing c to 50 will automatically set k to 1. Changing parameters will immediately update and bring the current scenario to the initial state.
  4. Liquidity Market. When you activate the “Comparative statics”, both the cand rsliders will be enabled. The default values are set to the current values of cand r respectively. Changing cand rwill result in a new money demand curve, and thus a new equilibrium. The new equilibrium and the new demand curve are painted in red. Note that when using comparative statics, only the M1will be drawn (even if the current scenario still hasn’t reached equilibrium). Furthermore the graph will be rescaled so that the equilibrium point appears in around the middle of the graph. To turn off comparative statics, simply uncheck its check-box. Changing either one of the parameters c, k, r or B will also turn off the comparative statics.
  5. Dynamic Approach. The playback buttons here are used to control the iteration process of the money creation model. The slider is used to control the playback speed. A low playback speed will result in a longer animation duration, and if auto iteration is on it will cause a longer delay between each iteration. The functions of these buttons are explained below:




    Jump to the initial state of the current scenario


    Go to the previous period


    Go to the previous step


    Start auto iteration. When auto iteration is on, this button will change into PIC. Clicking this button while auto iteration is on will turn it off. Using the auto iteration button has the same effect as clicking the PIC button multiple times at a regular interval until the equilibrium is reached. The interval between the clicks can be controlled using the slider. After the equilibrium is reached, the auto iteration will stop automatically.


    Iterate to the next step


    Iterate to the next period. If you are in an odd step, this button will have the same effect as the PIC button. If you are in an even step, pressing this button will have the same effect as pressing the PIC button twice.


    Jump into the last step of the scenario (i.e. the equilibrium)

  6. Summary.


Discussion blablabla.

Concluding Comment