Money creation, or money issuance, is the process by which the money supply of a country or economic region is increased. In most modern economies, both central banks and commercial banks create money. Central banks issue money as a liability, typically called reserve deposits, which is available only for use by central bank account holders. These account holders are generally large commercial banks and foreign central banks.

Central banks can increase the quantity of reserve deposits directly by making loans to account holders, purchasing assets from account holders, or by recording an asset (such as a deferred asset) and directly increasing liabilities. However, the majority of the money supply that the public uses for conducting transactions is created by the commercial banking system in the form of commercial bank deposits. Bank loans issued by commercial banks expand the quantity of bank deposits.

Money creation occurs when the amount of loans issued by banks increases relative to the repayment and default of existing loans. Governmental authorities, including central banks and other bank regulators, can use various policies—mainly setting short-term interest rates—to influence the amount of bank deposits that commercial banks create.

The monetary authority of a nation—typically its central bank—influences the economy by creating and destroying liabilities on its balance sheet with the intent to change the supply of money available for conducting transactions and generating income. The policy that defines how the central bank changes its ledger to reduce or increase the amount of money in the economy available for banks to conduct transactions is known as monetary policy.

If the central bank is charged by law with maintaining price or employment levels in the economy, monetary policy may include reducing the money supply during times of high inflation to increase unemployment. The hope is that reducing employment will also reduce spending on goods and services that exhibit increasing prices. Monetary policy directly impacts the availability and cost of commercial bank deposits in the economy, which in turn impacts investment, stock prices, private consumption, demand for money, and overall economic activity. A country's exchange rate influences the value of its net exports.

In most developed countries, central banks conduct their monetary policy within an inflation targeting framework, whereas the monetary policies of most developing countries' central banks target some kind of fixed exchange rate system. Central banks operate in practically every nation in the world, with few exceptions. There are also groups of countries for which a single entity acts as their central bank, such as the organization of states of Central Africa, which have a common central bank (the Bank of Central African States), or monetary unions, such as the Eurozone. In the Eurozone, nations retain their respective central banks yet submit to the policies of a central entity, the European Central Bank.

Central banks conduct monetary policy by setting an interest rate paid on central bank deposit liabilities, directly purchasing or selling assets to change the amount of deposits on their balance sheet, or by signaling to the market through speeches and written guidance an intent to change the interest rate on deposits or to purchase or sell assets in the future.

Lowering interest rates by reducing the amount of interest paid on central bank liabilities or purchasing assets like bank loans and government bonds for higher prices (which results in an increase in bank reserve deposits on the central bank ledger) is called monetary expansion or monetary easing. In contrast, raising rates by paying more interest on central bank liabilities is known as monetary contraction or tightening (which results in a decrease of bank reserve deposits on the central bank ledger). An extraordinary process of monetary easing (keeping rates low) is denoted as quantitative easing, which involves the central bank purchasing large amounts of assets for high prices over an extended period.