The influence of the public’s behaviour on liquidity creation

Abstract

While liquid funds in the hands of public and private operators cannot be created except by the credit system and the treasury, it is not equally easy to grasp how the public’s behaviour may effect the amount of liquid resources in existence. The credit system can influence public’s capacity to hold financial assets through loans. However, it cannot decide at its discretion the volume of financial assets held by the public. On the contrary, in several ways, e.g. through convertibility, the public can make its influence felt on monetary reserves, and as a consequence on the nominal volume of financial assets. Thus, if the first priority of economic policy is assigned to the maintenance of monetary stability, the monetary authorities have few margins to regulate at their discretion the trend of liquid assets at the market’s disposal. JEL: E03, E51, E52, G02

Keywords

• Liquid funds
• credit system
• treasury
• public behaviour
• nominal volume of financial assets
• monetary reserves