Accounting system dynamics modeling of money stock as debts : theory and case analysis of Japan

Money stock, defined as the sum of coins, notes, demand and time deposits, decisively affects macroeconomic variables such as GDP and price. Yet its true nature has been obscured in economics. Where does it come from? How are they created, and how much? Concerning money creation under the fractional reserve banking system, the intermediation and deposit creation theory of banking have coexisted. In this chapter, we apply accounting system dynamics modeling framework to investigate the process of money creation by building a simple simulation model and then apply theoretical insights obtained to a case study on the flow of funds accounts in Japan between 1980-2017. We found that money stock equals total domestic debts financed by banks, to non-banking private and public sectors including non-financial corporations, households, and the government. An intermediate divergence of the equality between 1994-2014 calls for further specification and precision of proxy time series. Current empirical finding demonstrates that the majority of money is created as interest-bearing debts, confirming the consistency of deposit creation at a national level. Consequently, it should not be ignored in economic theory and policy analysis.