The Reserve Bank of Fiji (RBF) is responsible for printing the country’s currency notes and minting its coins as well as ensuring that there is an adequate supply of high quality currency in circulation to meet the demand for payment purposes in the economy. The RBF issues currency to commercial banks for circulation to the public and also redeems any mutilated currency received from banks that are no longer fit for circulation. Over the course of its circulation in the banking system, money “grows” in what is termed as the money multiplier effect. This article is aimed at helping to understand how the process of money creation works.
2.0 How Does the Money Multiplier Work?
In many economies, a significant portion of money is held as bank deposits. In Fiji, money supply comprises notes and coins circulating in the economy and money placed with commercial banks and licensed credit institutions. Banks in Fiji hold most of the money supply which totalled around $7,381.5 million in September 2016, consisting of notes and coins, demand and savings deposits (58.4%) and term deposits including securities (41.6%). Term deposits are placed with banks for a specific interest rate and a maturity date (Chart 1).