Money creation occurs when a central bank, such as the Federal Reserve in the United States or the European Central Bank (ECB), creates new money and adds it to the economy. This process is also known as monetary expansion. There are a few different ways in which money can be created, but one common method is through off-balance sheet to on-balance sheet conversion.

Off-balance sheet refers to assets or liabilities that are not included on a balance sheet. These assets and liabilities may still have an impact on the financial position, but they are not included in the traditional balance sheet presentation. On the other hand, on-balance sheet items are included in the balance sheet and are used to represent the financial position.

In the context of money creation, off-balance sheet to on-balance sheet conversion refers to the process of converting an off-balance sheet asset or liability into an on-balance sheet asset or liability. This can occur when a central bank purchases an asset, such as a government bond, from a bank and adds it to its balance sheet. By doing so, the central bank is effectively creating new money and adding it to the economy.

There are a few different ways in which a central bank can conduct off-balance sheet to on-balance sheet conversion. One common method is through open market operations, in which the central bank buys or sells securities in the open market in order to affect the supply of money in the economy. Another method is through the use of lending facilities, in which the central bank provides loans to banks in order to increase the supply of money.

Central banks in countries outside of the United States, such as the European Central Bank (ECB) and the Bank of Japan, also use off-ledger to on-ledger conversion as a tool for monetary policy. Like the Federal Reserve in the United States, these central banks have the ability to create new money and add it to the economy through the purchase of assets, such as government bonds. By conducting off-ledger to on-ledger conversion, these central banks can move the assets onto their balance sheets and effectively create new money.

Overall, off-balance sheet to on-balance sheet conversion is an important part of the money creation process. By converting off-balance sheet assets and liabilities into on-balance sheet assets and liabilities, central banks are able to create new money and add it to the economy. This process helps to regulate the supply of money and maintain a stable financial system. To understand as well the role of Shadow Money, please click here.