Money supply

Last updated

China M2 money supply vs USA M2 money supply China M2 money supply vs USA money supply.png
China M2 money supply vs USA M2 money supply
Comparative chart on money supply growth against inflation rates Money supply growth vs inflation rates.png
Comparative chart on money supply growth against inflation rates
M2 as a percent of GDP M2 as a %25 of GDP.png
M2 as a percent of GDP

In macroeconomics, the money supply (or money stock) refers to the total volume of money held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circulation (i.e. physical cash) and demand deposits (depositors' easily accessed assets on the books of financial institutions). [1] [2] Money supply data is recorded and published, usually by the national statistical agency or the central bank of the country. Empirical money supply measures are usually named M1, M2, M3, etc., according to how wide a definition of money they embrace. The precise definitions vary from country to country, in part depending on national financial institutional traditions.

Contents

Even for narrow aggregates like M1, by far the largest part of the money supply consists of deposits in commercial banks, whereas currency (banknotes and coins) issued by central banks only makes up a small part of the total money supply in modern economies. The public's demand for currency and bank deposits and commercial banks' supply of loans are consequently important determinants of money supply changes. As these decisions are influenced by central banks' monetary policy, not least their setting of interest rates, the money supply is ultimately determined by complex interactions between non-banks, commercial banks and central banks.

According to the quantity theory supported by the monetarist school of thought, there is a tight causal connection between growth in the money supply and inflation. In particular during the 1970's and 1980's this idea was influential, and several major central banks during that period attempted to control the money supply closely, following a monetary policy target of increasing the money supply stably. However, the strategy was generally found to be impractical because money demand turned out to be too unstable for the strategy to work as intended.

Consequently, the money supply has lost its central role in monetary policy, and central banks today generally do not try to control the money supply. Instead they focus on adjusting interest rates, in developed countries normally as part of a direct inflation target which leaves little room for a special emphasis on the money supply. Money supply measures may still play a role in monetary policy, however, as one of many economic indicators that central bankers monitor to judge likely future movements in central variables like employment and inflation.

Measures of money supply

In accordance to "credit mechanics": Bank money expansion or destruction (or unchangement) are depending on payment flows (after given loans by commercial banks to nonbank sector[s]). Credit Mechanics 4 mechanical interrelationships governing the credit volume (Table 1 by F. Decker & C. Goodhart 2021).PNG
In accordance to "credit mechanics": Bank money expansion or destruction (or unchangement) are depending on payment flows (after given loans by commercial banks to nonbank sector[s]).
CPI-Urban (blue) vs M2 money supply (red); recessions in gray CPI vs M2 money supply increases.png
CPI-Urban (blue) vs M2 money supply (red); recessions in gray

There are several standard measures of the money supply, [4] classified along a spectrum or continuum between narrow and broad monetary aggregates. Narrow measures include only the most liquid assets: those most easily used to spend (currency, checkable deposits). Broader measures add less liquid types of assets (certificates of deposit, etc.).

This continuum corresponds to the way that different types of money are more or less controlled by monetary policy. Narrow measures include those more directly affected and controlled by monetary policy, whereas broader measures are less closely related to monetary-policy actions. [5]

The different types of money are typically classified as "M"s. The "M"s usually range from M0 (narrowest) to M3 (and M4 in some countries [6] ) (broadest), but which "M"s, if any, are actually focused on in central bank communications depends on the particular institution. A typical layout for each of the "M"s is as follows for the United States:

Type of moneyM0MBM1M2M3MZM
Notes and coins in circulation (outside Federal Reserve Banks and the vaults of depository institutions) (currency)✓ [7] ✓✓✓✓✓
Notes and coins in bank vaults (vault cash)✓
Federal Reserve Bank credit (required reserves and excess reserves not physically present in banks)✓
Traveler's checks of non-bank issuers✓✓✓✓
Demand deposits ✓✓✓✓
Other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts.✓ [8] ✓✓✓
Savings deposits ✓ [9] ✓✓✓
Time deposits less than $100,000 and money-market deposit accounts for individuals✓✓
Large time deposits, institutional money market funds, short-term repurchase and other larger liquid assets [10] ✓
All money market funds ✓

Creation of money

Both central banks and commercial banks play a role in the process of money creation. In short, in the fractional-reserve banking system used throughout the world, money can be subdivided into two types: [17] [18] [19]

In the money supply statistics, central bank money is MB while the commercial bank money is divided up into the M1-M3 components, where it makes up the non-M0 component.

By far the largest part of the money used by individuals and firms to execute economic actions are commercial bank money, i.e. deposits issued by banks and other financial institutions. In the United Kingdom, deposit money outweighs the central bank issued currency by a factor of more than 30 to 1. In the United States, where the country's currency has a special international role being used in many transactions around the world, legally as well as illegally, the ratio is still more than 8 to 1. [20] Commercial banks create money whenever they make a loan and simultaneously create a matching deposit in the borrower's bank account. In return, money is destroyed when the borrower pays back the principal on the loan. [21] Movements in the money supply therefore to a large extent depend on the decisions of commercial banks to supply loans and consequently deposits, and the public's behavior in demanding currency as well as bank deposits. [20] These decisions are influenced by the monetary policy of central banks, so that money supply is ultimately created by complex interactions between banks, non-banks and central banks. [22]

Even though central banks today rarely try to control the amount of money in circulation, their policies still impact the actions of both commercial banks and their costumers. When setting the interest rate on central bank reserves, interest rates on bank loans are affected, which in turn affects their demand. Central banks may also affect the money supply more directly by engaging in various open market operations. [21] They can increase the money supply by purchasing government securities, such as government bonds or treasury bills. This increases the liquidity in the banking system by converting the illiquid securities of commercial banks into liquid deposits at the central bank. This also causes the price of such securities to rise due to the increased demand, and interest rates to fall. In contrast, when the central bank "tightens" the money supply, it sells securities on the open market, drawing liquid funds out of the banking system. The prices of such securities fall as supply is increased, and interest rates rise. [23]

In some economics textbooks, the supply-demand equilibrium in the markets for money and reserves is represented by a simple so-called money multiplier relationship between the monetary base of the central bank and the resulting money supply including commercial bank deposits. This is a short-hand simplification which disregards several other factors determining commercial banks' reserve-to-deposit ratios and the public's money demand. [20] [21] [24]

National definitions of "money"

East Asia

Hong Kong

HKD vs USD over the year HKD vs USD over the year.svg
HKD vs USD over the year

In 1967, when sterling was devalued, the Hong Kong dollar's peg to the pound was increased from 1 shilling 3 pence (£1 = HK$16) to 1 shilling 4½ pence (£1 = HK$14.5455) although this did not entirely offset the devaluation of sterling relative to the US dollar (it went from US$1 = HK$5.71 to US$1 = HK$6.06). In 1972 the Hong Kong dollar was pegged to the US dollar at a rate of US$1 = HK$5.65. This was reduced to HK$5.085 in 1973. Between 1974 and 1983 the Hong Kong dollar floated. On October 17, 1983, the currency was pegged at a rate of US$1 = HK$7.80 through the currency board system.

As of May 18, 2005, in addition to the lower guaranteed limit, a new upper guaranteed limit was set for the Hong Kong dollar at 7.75 to the American dollar. The lower limit was lowered from 7.80 to 7.85 (by 100 pips per week from May 23 to June 20, 2005). The Hong Kong Monetary Authority indicated that this move was to narrow the gap between the interest rates in Hong Kong and those of the United States. A further aim of allowing the Hong Kong dollar to trade in a range is to avoid the HK dollar being used as a proxy for speculative bets on a renminbi revaluation.

The Hong Kong Basic Law and the Sino-British Joint Declaration provides that Hong Kong retains full autonomy with respect to currency issuance. Currency in Hong Kong is issued by the government and three local banks under the supervision of the territory's de facto central bank, the Hong Kong Monetary Authority. Bank notes are printed by Hong Kong Note Printing.

A bank can issue a Hong Kong dollar only if it has the equivalent exchange in US dollars on deposit. The currency board system ensures that Hong Kong's entire monetary base is backed with US dollars at the linked exchange rate. The resources for the backing are kept in Hong Kong's exchange fund, which is among the largest official reserves in the world. Hong Kong also has huge deposits of US dollars, with official foreign currency reserves of 331.3 billion USD as of September 2014. [25]

Japan

Japanese money supply (April 1998 - April 2008) Money supply of japan.gif
Japanese money supply (April 1998 – April 2008)

The Bank of Japan defines the monetary aggregates as: [26]

  • M1: cash currency in circulation, plus deposit money
  • M2 + CDs: M1 plus quasi-money and CDs
  • M3 + CDs: M2 + CDs plus deposits of post offices; other savings and deposits with financial institutions; and money trusts
  • Broadly defined liquidity: M3 and CDs, plus money market, pecuniary trusts other than money trusts, investment trusts, bank debentures, commercial paper issued by financial institutions, repurchase agreements and securities lending with cash collateral, government bonds and foreign bonds

Europe

United Kingdom

M4 money supply of the United Kingdom 1984-2007. In thousand millions (billions) of pounds sterling. M4 money supply.svg
M4 money supply of the United Kingdom 1984–2007. In thousand millions (billions) of pounds sterling.

There are just two official UK measures. M0 is referred to as the "wide monetary base" or "narrow money" and M4 is referred to as "broad money" or simply "the money supply".

  • M0: Notes and coin in circulation plus banks' reserve balance with Bank of England. (When the bank introduced Money Market Reform in May 2006, the bank ceased publication of M0 and instead began publishing series for reserve balances at the Bank of England to accompany notes and coin in circulation. [27] )
  • M4: Cash outside banks (i.e. in circulation with the public and non-bank firms) plus private-sector retail bank and building society deposits plus private-sector wholesale bank and building society deposits and certificates of deposit. [28] In 2010 the total money supply (M4) measure in the UK was £2.2 trillion while the actual notes and coins in circulation totalled only £47 billion, 2.1% of the actual money supply. [29]

There are several different definitions of money supply to reflect the differing stores of money. Owing to the nature of bank deposits, especially time-restricted savings account deposits, M4 represents the most illiquid measure of money. M0, by contrast, is the most liquid measure of the money supply.

Eurozone

The euro money supplies M0, M1, M2 and M3, and euro zone GDP from 1980-2021. Logarithmic scale. Money supply Euro.png
The euro money supplies M0, M1, M2 and M3, and euro zone GDP from 1980–2021. Logarithmic scale.

The European Central Bank's definition of euro area monetary aggregates: [30]

  • M1: Currency in circulation plus overnight deposits
  • M2: M1 plus deposits with an agreed maturity up to two years plus deposits redeemable at a period of notice up to three months.
  • M3: M2 plus repurchase agreements plus money market fund (MMF) shares/units, plus debt securities up to two years

North America

United States

MB, M1 and M2 from 1959 to 2021 (all shown in billions) Link. Note that before April 24, 2020 savings accounts were not part of M1 US Monetary Base, M1, M2 January 1959 - October 2010.png
MB, M1 and M2 from 1959 to 2021 (all shown in billions) Link. Note that before April 24, 2020 savings accounts were not part of M1
M0, M1 and M3. US-GDP and M3 of Eurozone for comparison. Logarithmic scale. M0-Money supply of the USA.jpg
M0, M1 and M3. US-GDP and M3 of Eurozone for comparison. Logarithmic scale.
Money supply decreased by several percent between Black Tuesday and the Bank Holiday in March 1933 when there were massive bank runs across the United States. Money supply during the great depression era.png
Money supply decreased by several percent between Black Tuesday and the Bank Holiday in March 1933 when there were massive bank runs across the United States.
M2 vs CPI Inflation M2 CPI.webp
M2 vs CPI

The United States Federal Reserve published data on three monetary aggregates until 2006, when it ceased publication of M3 data [14] and only published data on M1 and M2. M1 consists of money commonly used for payment, basically currency in circulation and checking account balances; and M2 includes M1 plus balances that generally are similar to transaction accounts and that, for the most part, can be converted fairly readily to M1 with little or no loss of principal. The M2 measure is thought to be held primarily by households. Prior to its discontinuation, M3 comprised M2 plus certain accounts that are held by entities other than individuals and are issued by banks and thrift institutions to augment M2-type balances in meeting credit demands, as well as balances in money market mutual funds held by institutional investors. The aggregates have had different roles in monetary policy as their reliability as guides has changed. The principal components are: [32]

Prior to 2020, savings accounts were counted as M2 and not part of M1 as they were not considered "transaction accounts" by the Fed. (There was a limit of six transactions per cycle that could be carried out in a savings account without incurring a penalty.) On March 15, 2020, the Federal Reserve eliminated reserve requirements for all depository institutions and rendered the regulatory distinction between reservable "transaction accounts" and nonreservable "savings deposits" unnecessary. On April 24, 2020, the Board removed this regulatory distinction by deleting the six-per-month transfer limit on savings deposits. From this point on, savings account deposits were included in M1. [9]

Although the Treasury can and does hold cash and a special deposit account at the Fed (TGA account), these assets do not count in any of the aggregates. So in essence, money paid in taxes paid to the Federal Government (Treasury) is excluded from the money supply. To counter this, the government created the Treasury Tax and Loan (TT&L) program in which any receipts above a certain threshold are redeposited in private banks. The idea is that tax receipts won't decrease the amount of reserves in the banking system. The TT&L accounts, while demand deposits, do not count toward M1 or any other aggregate either.

When the Federal Reserve announced in 2005 that they would cease publishing M3 statistics in March 2006, they explained that M3 did not convey any additional information about economic activity compared to M2, and thus, "has not played a role in the monetary policy process for many years." Therefore, the costs to collect M3 data outweighed the benefits the data provided. [14] Some politicians have spoken out against the Federal Reserve's decision to cease publishing M3 statistics and have urged the U.S. Congress to take steps requiring the Federal Reserve to do so. Congressman Ron Paul (R-TX) claimed that "M3 is the best description of how quickly the Fed is creating new money and credit. Common sense tells us that a government central bank creating new money out of thin air depreciates the value of each dollar in circulation." [34] Modern Monetary Theory disagrees. It holds that money creation in a free-floating fiat currency regime such as the U.S. will not lead to significant inflation unless the economy is approaching full employment and full capacity. Some of the data used to calculate M3 are still collected and published on a regular basis. [14] Current alternate sources of M3 data are available from the private sector. [35]

In the United States, a bank's reserves consist of U.S. currency held by the bank (also known as "vault cash" [36] ) plus the bank's balances in Federal Reserve accounts. [37] [38] For this purpose, cash on hand and balances in Federal Reserve ("Fed") accounts are interchangeable (both are obligations of the Fed). Reserves may come from any source, including the federal funds market, deposits by the public, and borrowing from the Fed itself. [39]

As of April 2013, the monetary base was $3 trillion [40] and M2, the broadest measure of money supply, was $10.5 trillion. [41]

Oceania

Australia

The money supply of Australia 1984-2022 Australian Money Supply.PNG
The money supply of Australia 1984–2022

The Reserve Bank of Australia defines the monetary aggregates as: [42]

  • M1: currency in circulation plus bank current deposits from the private non-bank sector [43]
  • M3: M1 plus all other bank deposits from the private non-bank sector, plus bank certificate of deposits, less inter-bank deposits
  • Broad money: M3 plus borrowings from the private sector by NBFIs, less the latter's holdings of currency and bank deposits
  • Money base: holdings of notes and coins by the private sector plus deposits of banks with the Reserve Bank of Australia (RBA) and other RBA liabilities to the private non-bank sector.

New Zealand

New Zealand money supply 1988-2008 New zealand money supply 1988-2008.jpg
New Zealand money supply 1988–2008

The Reserve Bank of New Zealand defines the monetary aggregates as: [44]

  • M1: notes and coins held by the public plus chequeable deposits, minus inter-institutional chequeable deposits, and minus central government deposits
  • M2: M1 + all non-M1 call funding (call funding includes overnight money and funding on terms that can of right be broken without break penalties) minus inter-institutional non-M1 call funding
  • M3: the broadest monetary aggregate. It represents all New Zealand dollar funding of M3 institutions and any Reserve Bank repos with non-M3 institutions. M3 consists of notes & coin held by the public plus NZ dollar funding minus inter-M3 institutional claims and minus central government deposits

South Asia

India

Components of the money supply of India in billions of Rupee for 1950-2011 India Money Supply Components--Larger Label Fonts.png
Components of the money supply of India in billions of Rupee for 1950–2011

The Reserve Bank of India defines the monetary aggregates as: [45]

  • Reserve money (M0): Currency in circulation, plus bankers' deposits with the RBI and 'other' deposits with the RBI. Calculated from net RBI credit to the government plus RBI credit to the commercial sector, plus RBI's claims on banks and net foreign assets plus the government's currency liabilities to the public, less the RBI's net non-monetary liabilities. M0 outstanding was ₹30.297 trillion as on March 31, 2020.
  • M1: Currency with the public plus deposit money of the public (demand deposits with the banking system and 'other' deposits with the RBI). M1 was 184 per cent of M0 in August 2017.
  • M2: M1 plus savings deposits with post office savings banks. M2 was 879 per cent of M0 in August 2017.
  • M3 (the broad concept of money supply): M1 plus time deposits with the banking system, made up of net bank credit to the government plus bank credit to the commercial sector, plus the net foreign exchange assets of the banking sector and the government's currency liabilities to the public, less the net non-monetary liabilities of the banking sector (other than time deposits). M3 was 555 per cent of M0 as on March 31, 2020(i.e. ₹167.99 trillion.)
  • M4: M3 plus all deposits with post office savings banks (excluding National Savings Certificates). [46]

Importance of money supply

The importance which has historically been attached to the money supply in the monetary policy of central banks is due to the suggestion that movements in money may determine important economic variables like prices (and hence inflation), output and employment. Indeed, two prominent analytical frameworks in the 20th century both built on this premise: the Keynesian IS-LM model and the monetarist quantity theory of money. [20]

IS-LM model

The IS-LM model was introduced by John Hicks in 1937 to describe Keynesian macroeconomic theory. Between the 1940s and mid-1970s, it was the leading framework of macroeconomic analysis [47] and is still today an important conceptual introductory tool in many macroeconomics textbooks. [48] In the traditional version of this model it is assumed that the central bank conducts monetary policy by increasing or decreasing the money supply, which affects interest rates and consequently investment, aggregate demand and output.

In light of the fact that modern central banks have generally ceased to target the money supply as an explicit policy variable, [49] in some more recent macroeconomic textbooks the IS-LM model has been modified to incorporate the fact that rather than manipulating the money supply, central banks tend to conduct their policies by setting policy interest rates more directly. [23]

Quantity theory of money

According to the quantity theory of money, inflation is caused by movements in the supply of money and hence can be controlled by the central bank if the bank controls the money supply. The theory builds upon Irving Fisher's equation of exchange from 1911: [50]

where

In practice, macroeconomists almost always use real GDP to define Q, omitting the role of all other transactions. [51] Either way, the equation in itself is an identity which is true by definition rather than describing economic behavior. That is, velocity is defined by the values of the other three variables. Unlike the other terms, the velocity of money has no independent measure and can only be estimated by dividing PQ by M. Adherents of the quantity theory of money assume that the velocity of money is stable and predictable, being determined mostly by financial institutions. If that assumption is valid, then changes in M can be used to predict changes in PQ. [52] If not, then a model of V is required in order for the equation of exchange to be useful as a macroeconomics model or as a predictor of prices.

Most macroeconomists replace the equation of exchange with equations for the demand for money which describe more regular economic behavior. However, predictability (or the lack thereof) of the velocity of money is equivalent to predictability (or the lack thereof) of the demand for money (since in equilibrium real money demand is simply Q/V).

There is some empirical evidence of a direct relationship between the growth of the money supply and long-term price inflation, at least for rapid increases in the amount of money in the economy. [53] The quantity theory was a cornerstone for the monetarists and in particular Milton Friedman, who together with Anna Schwartz in 1963 in a pioneering work documented the relationship between money and inflation in the United States during the period 1867–1960. [20] During the 1970's and 1980's the monetarist ideas were increasingly influential, and major central banks like the Federal Reserve, the Bank of England and the German Bundesbank officially followed a monetary policy objective of increasing the money supply in a stable way. [51]

Declining importance

Starting in the mid-1970s and increasingly over the next decades, the empirical correlation between fluctuations in the money supply and changes in income or prices broke down, and there appeared clear evidence that money demand (or, equivalently, velocity) was unstable, at least in the short and medium run, which is the time horizon that is relevant to monetary policy. This made a money target less useful for central banks and led to the decline of money supply as a tool of monetary policy. Instead central banks generally switched to steering interest rates directly, allowing money supply to fluctuate to accommodate fluctuations in money demand. [20] Concurrently, most central banks in developed countries implemented direct inflation targeting as the foundation of their monetary policy, [54] which leaves little room for a special emphasis on the money supply. In the United States, the strategy of targeting the money supply was tried under Federal Reserve chairman Paul Volcker from 1979, but was found to be impractical and later given up. [55] According to Benjamin Friedman, the number of central banks that actively seek to influence money supply as an element of their monetary policy is shrinking to zero. [20]

Even though today central banks generally do not try to determine the money supply, monitoring money supply data may still play a role in the preparation of monetary policy as part of a wide array of financial and economic data that policymakers review. [56] Developments in money supply may contain information of the behavior of commercial banks and of the general economic stance which is useful for judging future movements in, say, employment and inflation. [57] Also in this respect, however, money supply data have a mixed record. In the United States, for instance, the Conference Board Leading Economic Index originally included a real money supply (M2) component as one of its 10 leading indicators, but removed it from the index in 2012 after having ascertained that it had performed poorly as a leading indicator since 1989. [58]

See also

Related Research Articles

<span class="mw-page-title-main">Federal Reserve</span> Central banking system of the United States of America

The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics led to the desire for central control of the monetary system in order to alleviate financial crises. Over the years, events such as the Great Depression in the 1930s and the Great Recession during the 2000s have led to the expansion of the roles and responsibilities of the Federal Reserve System.

<span class="mw-page-title-main">Inflation</span> Devaluation of currency over a period of time.

In economics, inflation is a general increase of the prices. This is usually measured using the consumer price index (CPI). When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money. The opposite of CPI inflation is deflation, a decrease in the general price level of goods and services. The common measure of inflation is the inflation rate, the annualized percentage change in a general price index. As prices faced by households do not all increase at the same rate, the consumer price index (CPI) is often used for this purpose. The employment cost index is also used for wages in the United States.

<span class="mw-page-title-main">Deflation</span> Decrease in the general price level of goods and services

In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%. Inflation reduces the value of currency over time, but sudden deflation increases it. This allows more goods and services to be bought than before with the same amount of currency. Deflation is distinct from disinflation, a slow-down in the inflation rate, i.e., when inflation declines to a lower rate but is still positive.

<span class="mw-page-title-main">Interest rate</span> Percentage of a sum of money charged for its use

An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed. The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency, and the length of time over which it is lent, deposited, or borrowed.

<span class="mw-page-title-main">Monetary policy of the United States</span> Political Policy

The monetary policy of The United States is the set of policies which the Federal Reserve follows to achieve its twin objectives of high employment and stable inflation.

<span class="mw-page-title-main">Monetary policy</span> Policy of interest rates or money supply

Monetary policy is the policy adopted by the monetary authority of a nation to affect monetary and other financial conditions to accomplish broader objectives like high employment and price stability. Further purposes of a monetary policy may be to contribute to economic stability or to maintain predictable exchange rates with other currencies. Today most central banks in developed countries conduct their monetary policy within an inflation targeting framework, whereas the monetary policies of most developing countries' central banks target some kind of a fixed exchange rate system. A third monetary policy strategy, targeting the money supply, was widely followed during the 1980s, but has diminished in popularity since that, though it is still the official strategy in a number of emerging economies.

<span class="mw-page-title-main">Currency board</span> Monetary authority which maintains a fixed exchange rate to a foreign currency

In public finance, a currency board is a monetary authority which is required to maintain a fixed exchange rate with a foreign currency. This policy objective requires the conventional objectives of a central bank to be subordinated to the exchange rate target. In colonial administration, currency boards were popular because of the advantages of printing appropriate denominations for local conditions, and it also benefited the colony with the seigniorage revenue. However, after World War II many independent countries preferred to have central banks and independent currencies.

<span class="mw-page-title-main">Monetary base</span> Measure of money supply

In economics, the monetary base in a country is the total amount of money created by the central bank. This includes:

Reserve requirements are central bank regulations that set the minimum amount that a commercial bank must hold in liquid assets. This minimum amount, commonly referred to as the commercial bank's reserve, is generally determined by the central bank on the basis of a specified proportion of deposit liabilities of the bank. This rate is commonly referred to as the reserve ratio. Though the definitions vary, the commercial bank's reserves normally consist of cash held by the bank and stored physically in the bank vault, plus the amount of the bank's balance in that bank's account with the central bank. A bank is at liberty to hold in reserve sums above this minimum requirement, commonly referred to as excess reserves.

Foreign exchange reserves are cash and other reserve assets such as gold held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence the foreign exchange rate of its currency, and to maintain confidence in financial markets. Reserves are held in one or more reserve currencies, nowadays mostly the United States dollar and to a lesser extent the euro.

In monetary economics, a money multiplier is one of various closely related ratios of commercial bank money to central bank money under a fractional-reserve banking system. It relates to the maximum amount of commercial bank money that can be created, given a certain amount of central bank money. In a fractional-reserve banking system that has legal reserve requirements, the total amount of loans that commercial banks are allowed to extend is equal to a multiple of the amount of reserves. This multiple is the reciprocal of the reserve ratio minus one, and it is an economic multiplier. The actual ratio of money to central bank money, also called the money multiplier, is lower because some funds are held by the non-bank public as currency. Also, banks may hold excess reserves, being reserves above the reserve requirement set by the central bank.

<span class="mw-page-title-main">Money creation</span> Process by which the money supply of an economic region is increased

Money creation, or money issuance, is the process by which the money supply of a country, or of an economic or monetary region, is increased. In most modern economies, money creation is controlled by the central banks. Money issued by central banks is termed base money. Central banks can increase the quantity of base money directly, by engaging in open market operations. However, the majority of the money supply is created by the commercial banking system in the form of bank deposits. Bank loans issued by commercial banks that practice fractional reserve banking expands the quantity of broad money to more than the original amount of base money issued by the central bank.

A linked exchange rate system is a type of exchange rate regime that pegs the exchange rate of one currency to another. It is the exchange rate system implemented in Hong Kong to stabilise the exchange rate between the Hong Kong dollar (HKD) and the United States dollar (USD). The Macao pataca (MOP) is similarly linked to the Hong Kong dollar.

<span class="mw-page-title-main">Money</span> Object or record accepted as payment

Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are: medium of exchange, a unit of account, a store of value and sometimes, a standard of deferred payment.

In economics, broad money is a measure of the amount of money, or money supply, in a national economy including both highly liquid "narrow money" and less liquid forms. The European Central Bank, the OECD and the Bank of England all have their own different definitions of broad money.

<span class="mw-page-title-main">United States dollar</span> Official currency of the United States of America

The United States dollar is the official currency of the United States and several other countries. The Coinage Act of 1792 introduced the U.S. dollar at par with the Spanish silver dollar, divided it into 100 cents, and authorized the minting of coins denominated in dollars and cents. U.S. banknotes are issued in the form of Federal Reserve Notes, popularly called greenbacks due to their predominantly green color.

The Bernanke doctrine refers to measures, identified by Ben Bernanke while Chairman of the Board of Governors of the United States Federal Reserve, that the Federal Reserve can use in conducting monetary policy to combat deflation.

Monetary policy in the United States is associated with interest rates and availability of credit.

In the Philippines, monetary policy is the way the central bank, the Bangko Sentral ng Pilipinas, controls the supply and availability of money, the cost of money, and the rate of interest. With fiscal policy, monetary policy allows the government to influence the economy, control inflation, and stabilize currency.

The BONEX Plan was a forced conversion of bank time deposits to Treasury bonds performed by the Argentine government in January 1990.

References

  1. ↑ Alan Deardorff. "Money supply," Deardorff's Glossary of International Economics
  2. ↑ Karl Brunner, "money supply," The New Palgrave: A Dictionary of Economics , v. 3, p. 527.
  3. ↑ Frank Decker, Charles A.E. Goodhart (2021): Wilhelm Lautenbach’s credit mechanics – a precursor to the current money supply debate, Taylor & Francis, p. 8, DOI: 10.1080/09672567.2021.1963796.
  4. ↑ "What is the money supply? Is it important?". Board of Governors of the Federal Reserve System. December 16, 2015. Retrieved August 16, 2023.
  5. ↑ "money supply Definition". Archived from the original on April 12, 2019. Retrieved July 20, 2008.
  6. ↑ "Further details about M4 data". www.bankofengland.co.uk. January 31, 2023. Retrieved August 20, 2023.
  7. 1 2 "Gold, Oil, Stocks, Investments, Currencies, and the Federal Reserve: Growth of Global Money Supply" Archived September 15, 2015, at the Wayback Machine . DollarDaze Economic Commentary Blog by Mike Hewitt.
  8. ↑ M1 Money Stock (M1) – FRED – St. Louis Fed. Research.stlouisfed.org.
  9. 1 2 "Revisions to the H.6 Statistical Release". December 17, 2020.{{cite web}}: CS1 maint: url-status (link)
  10. ↑ M3 Definition. Investopedia (February 15, 2009).
  11. ↑ M0 (monetary base). Moneyterms.co.uk.
  12. ↑ "M0". Investopedia. Archived from the original on March 30, 2018. Retrieved July 20, 2008.
  13. ↑ "M2". Investopedia. Retrieved July 20, 2008.
  14. 1 2 3 4 Discontinuance of M3, Federal Reserve, November 10, 2005, revised March 9, 2006.
  15. ↑ Thayer, Gary (January 16, 2013). "Investors should assume that inflation will exceed the Fed's target". Macro Strategy. Wells Fargo Advisors. Archived from the original on July 14, 2014. Retrieved April 2, 2013.
  16. ↑ Carlson, John B.; Benjamin D. Keen (1996). "MZM: A monetary aggregate for the 1990s?" (PDF). Economic Review. Federal Reserve Bank of Cleveland. 32 (2): 15–23. Archived from the original (PDF) on September 4, 2012. Retrieved April 2, 2013.
  17. ↑ "The coexistence of central and commercial bank monies: multiple issuers, one currency". The Role of Central Bank Money in Payment Systems (PDF). Bank for International Settlements. p. 9.
  18. ↑ The Role of Central Bank Money in Payment Systems (PDF). Bank for International Settlements. p. 3. Contemporary monetary systems are based on the mutually reinforcing roles of central bank money and commercial bank monies.
  19. ↑ Domestic payments in Euroland: commercial and central bank money. European Central Bank. November 9, 2000. At the beginning of the 20th almost the totality of retail payments were made in central bank money. Over time, this monopoly came to be shared with commercial banks, when deposits and their transfer via checks and giros became widely accepted. Banknotes and commercial bank money became fully interchangeable payment media that customers could use according to their needs. While transaction costs in commercial bank money were shrinking, cashless payment instruments became increasingly used, at the expense of banknotes.
  20. 1 2 3 4 5 6 7 Friedman, Benjamin M. (2017). "Money Supply". The New Palgrave Dictionary of Economics. Palgrave Macmillan UK. pp. 1–10. doi:10.1057/978-1-349-95121-5_875-2 . Retrieved August 29, 2023.
  21. 1 2 3 McLeay, Michael. "Money Creation in the Modern Economy" (PDF). Bank of England.
  22. ↑ "The role of banks, non-banks and the central bank in the money creation process" (PDF). www.bundesbank.de. Deutsche Bundesbank Monthly Report. April 2017. Retrieved September 1, 2023.
  23. 1 2 Blanchard, Olivier; Amighini, Alessia; Giavazzi, Francesco (2021). Macroeconomics: a European perspective (4th ed.). Harlow: Pearson. pp. 78–86. ISBN   978-1-292-36089-8.
  24. ↑ Boermans, Martijn; Moore, Basil (2009). Locked-in and Sticky textbooks. Issuu.com.
  25. ↑ "Hong Kong's Latest Foreign Currency Reserve Assets Figures Released". Hong Kong Monetary Authority. Retrieved November 20, 2016.
  26. ↑ (PDF). Bank of Japan. p. 11 http://www.boj.or.jp/en/type/exp/stat/data/exms01.pdf.{{cite web}}: Missing or empty |title= (help)
  27. ↑ "Further details about M0 data". Bank of England. November 8, 2018.
  28. ↑ "Explanatory Notes – M4". Bank of England. Archived from the original on August 9, 2007. Retrieved August 13, 2007.
  29. ↑ Lipsey, Richard G.; Chrystal, K. Alec (2011). Economics (12th ed.). Oxford University Press. p. 455. ISBN   978-0199563388.
  30. ↑ "Monetary aggregates". European Central Bank. Retrieved November 20, 2016.
  31. ↑ "Savings are now more liquid and part of "M1 money"". St. Louis Federal Reserve Bank.
  32. ↑ "The Federal Reserve – Purposes and Functions". Federalreserve.gov. April 24, 2013. Retrieved December 11, 2013.
  33. ↑ "M1 Money Multiplier". research.stlouisfed.org. February 15, 1984. Retrieved December 3, 2015.
  34. ↑ What the Price of Gold Is Telling Us. Lewrockwell.com (April 25, 2006).
  35. ↑ "Alternate data". Shadowstats.com.
  36. ↑ 12 C.F.R. sec. 204.2(k).
  37. ↑ 12 C.F.R. sec. 204.5(a).
  38. ↑ What is vault cash? definition and meaning. Investorwords.com.
  39. ↑ "Net Free or Borrowed Reserves of Depository Institutions (NFORBRES) – FRED". research.stlouisfed.org. St. Louis Fed. January 1929..
  40. ↑ "Aggregate Reserves of Depository Institutions and the Monetary Base – H.3". Federal Reserve. Archived from the original on June 16, 2013.
  41. ↑ "H.6 Money Stock Measures". Federal Reserve Statistical Release. Federal Reserve. Archived from the original on June 16, 2013.
  42. ↑ "Glossary". Reserve Bank of Australia. November 11, 2015.
  43. ↑ "Updates to Australia's Financial Aggregates". Reserve Bank of Australia. March 21, 2019.
  44. ↑ Series description – Monetary and financial statistics. Rbnz.govt.nz.
  45. ↑ "Notes on Tables". Handbook of Statistics on Indian Economy (PDF). p. 4.
  46. ↑ "Press Releases of Reserve Bank of India on 16 Dec 2020".
  47. ↑ Bentolila, Samuel (2005). "Hicks–Hansen model". An Eponymous Dictionary of Economics: A Guide to Laws and Theorems Named after Economists. Edward Elgar. ISBN   978-1-84376-029-0.
  48. ↑ Colander, David (2004). "The Strange Persistence of the IS-LM Model" (PDF). History of Political Economy. 36 (Annual Supplement): 305–322. CiteSeerX   10.1.1.692.6446 . doi:10.1215/00182702-36-suppl_1-305. S2CID   6705939.
  49. ↑ Goodhart, C.A.E. (September 2017). "The determination of the money supply: flexibility versus control" (PDF). lse.ac.uk. London School of Economics and Political Science. Retrieved September 3, 2023.
  50. ↑ The Purchasing Power of Money, its Determination and Relation to Credit, Interest and Crises, Irving Fisher.
  51. 1 2 Graff, Michael (April 2008). "The quantity theory of money in historical perspective". www.research-collection.ethz.ch. KOF Swiss Economic Institute, ETH Zurich. Retrieved September 3, 2023.
  52. ↑ Aziz, John (March 10, 2013). "Is Inflation Always And Everywhere a Monetary Phenomenon?". Azizonomics. Retrieved April 2, 2013.
  53. ↑ Sysoyeva, Larysa; Bielova, Inna; Ryabushka, Luidmila; Demikhov, Oleksii (May 29, 2021). "Determinants of Management of Central Bank to Provide the Economic Growth: an Application of Structural Equation Modeling". Studies of Applied Economics. 39 (5). doi: 10.25115/eea.v39i5.4803 . ISSN   1697-5731. S2CID   236417850.
  54. ↑ "Inflation Targeting: Holding the Line". www.imf.org. Retrieved September 3, 2023.
  55. ↑ "Federal Reserve Board - Historical Approaches to Monetary Policy". Board of Governors of the Federal Reserve System. March 8, 2018. Retrieved August 12, 2023.
  56. ↑ "What is the money supply? Is it important?". Board of Governors of the Federal Reserve System. December 16, 2015. Retrieved July 31, 2023.
  57. ↑ Haltom, Renee (May 2013). "Does Money Still Matter for Monetary Policy?" (PDF). www.richmondfed.org. Federal Reserve Bank of Richmond. Retrieved September 3, 2023.
  58. ↑ "Real M2 and Its Impact on The Conference Board Leading Economic Index® (LEI) for the United States" (PDF). www.conference-board.org. The Conference Board. March 2010. Retrieved September 3, 2023.

Further reading

This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.