Measures of Money Supply

11 Key excerpts on "Measures of Money Supply"

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  eBook - ePub

  Trading Economics

  A Guide to Economic Statistics for Practitioners and Students

  • Trevor Williams, Victoria Turton(Authors)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  Since the start of the 1980s, broad money velocity has trended downwards, reflecting the growing importance of financial intermediation in the economy. That trend might be expected to reassert itself at some point. But the experience of the 1990s would suggest that the trend could be interrupted for an extended period, if the forces pushing up on velocity are persistent enough. The recent conjuncture suggests that there are economic factors pushing up on velocity relative to its historical trend. These are likely to persist in the near term, suggesting that a given rate of growth in nominal spending is likely to be associated with weaker growth in broad money than was typically the case before the crisis.

  With consumer and business confidence low, as surveys repeatedly demonstrate, and debt levels high, households and businesses are not willing to increase debt by borrowing more. Having said that, although QE has not worked to aggressively raise the growth rate of money supply (though there has been some effect), there has been, on the plus side, a lower long-term interest rate and this must have helped to lower the rate of default for households and businesses, ensuring also that lenders have more funds to deal with issues of solvency.

  DECOMPOSITION OF MONEY

  There are two ways of thinking about money supply – as the physical stock (instruments they are in) or the counterparts (the holders of the money).

  Physical Stock – Instruments They Are In

  If you add up the entire stock of money, i.e. in current accounts, on deposit with banks, building societies and so on, it can be shown as Measures of Money Supply, as follows:

  • M0 – M0 is the narrowest definition of the quantity of money in circulation. The definition used in the UK is bank notes and coins in circulation, plus banks' deposits with the Bank of England and money in banks' tills. M0 is also known as the monetary base. This term refers to the fact that the money measured by M0 supplies the base on which other forms of money (such as bank deposits) are based.
  • M1 – M1 is M0 plus saving accounts or sight deposits held by the private sector in banks and building societies in the UK. Sight deposits are sterling deposits that can be withdrawn on demand or that have been deposited overnight. It excludes non-sterling currencies.
  • M2 – M2 is M1 plus retail deposits or savings accounts.
  • M3 – M3 has been replaced by M4 in the UK as the main broad money measure. It is still, however, calculated as part of certain European aggregates. It consists of:
    • notes and coins in circulation (defined as for M1 and M2);
    • overnight deposits and sight deposits (as for M1);

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  Applied International Economics

  • W. Charles Sawyer, Richard L. Sprinkle(Authors)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  monetary base (B). The monetary base (B) is composed of cash in the hands of the

  BOX 15.1

  WHAT IS THE SUPPLY OF MONEY?

  Even though the public can hold money for a variety of reasons, the supply of money that is relevant for the purposes of economic policy is a measure of money that will be used for economic transactions within a given period of time, such as a year. Unfortunately, in most countries such a perfect measure of the money supply does not exist. For example, in the U.S. neither M1 nor M2 is identical to the supply of money the public uses for short-run economic transactions. The primary reason why this is true is related to the existence of money market mutual funds. These funds can be used for transactions, as each account has limited check-writing capabilities. In addition, these accounts are also widely used as a parking place for funds between the purchase and sale of equities, bonds, and other long-term financial assets. As a result, M1 understates the amount of money that the public could use for short-run economic transactions, and M2 overstates this same amount. In this case, the central bank of the U.S. cannot know with certainty what the amount of money is that the public intends to use for short-run economic activities. To a greater or lesser extent, every country has this problem of defining what the relevant supply of money is. In the discussion that follows, we assume that there is a relevant supply of money under the central bank’s control. However, one should keep in mind that the supply of money in an economy is not as clear-cut in most cases as central bankers or those following the state of the economy might like.

  public (C) and the total quantity of bank reserves (R) on deposit at the central bank. In precise terms, the monetary base is:

  B = C + R

  A country’s money supply is equal to the monetary base multiplied by the banking money multiplier. The banking money multiplier is equal to 1 divided by the reserve requirement

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  Money, Banking, And Financial Markets In China

  • Gang Yi(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  Money (Ml}= (Currency in circulation+ Deposits of other domes-tic transactor + Demand deposit in the banking system + Demand deposit in rural credit co-ops). 2. Quasi-money is defined as the sum of time deposit of institutions plus the total urban and rural households' saving. 3. M2 is defined as money plus quasi-money. 4. Reserve money = currency in circulation + Banks' reserve + De-posits of other domestic transactor. SOURCE: International Financial Statistics Yearbook, 1993, Interna-tional Monetary Fund (IMF), Washington, D.C. 5 The Money Supply Process There a.re many articles in the recent literature that discuss different aspects of the financial sector in China. For example, Feltenstein and Farha-dian ( 1987) construct a model of inflation by using a general equilibrium (or disequilibrium) framework. Chow (1987) estimates the demand for money in China. Perkins (1988) discusses the relationship between price reform and inflation. Feltenstein and Ha (1989) estimate the repressed inflation and liquidity overhang. Yi (1991b) discusses the monetization process. The task of this chapter is to investigate the money supply process. During economic reform, the banking system in China has changed from an all-inclusive mono-banking system to a more or less market-oriented central bank system. The money supply mechanism in this semi-reformed environment is unique in the sense that it has attributes of both a centrally planned economy and a market economy. Study of the money supply mech-anism is the primary focus of this chapter, which is organized as follows. Section 5.1 defines the monetary base and examines its components. Sec-tion 5.2 discusses the factors that influence the monetary base. The next section analyzes the multiplier effect of the money creation process. The fourth section addresses the factors that influence the multiplier and its predictability. The final section summarizes the relationship between the money supply and the monetary base, the multiplier.

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  Trading Economics

  A Guide to Economic Statistics for Practitioners and Students

  • Trevor Williams, Victoria Turton(Authors)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  The recent conjuncture suggests that there are economic factors pushing up on velocity relative to its histor-ical trend. These are likely to persist in the near term, suggesting that a given rate of growth in nominal spending is likely to be associated with weaker growth in broad money than was typically the case before the crisis. With consumer and business confidence low, as surveys repeatedly demonstrate, and debt levels high, households and businesses are not willing to increase debt by borrowing more. Having said that, although QE has not worked to aggressively raise the growth rate of money supply (though there has been some effect), there has been, on the plus side, a lower long-term interest rate and this must have helped to lower the rate of default for households and businesses, ensuring also that lenders have more funds to deal with issues of solvency. DECOMPOSITION OF MONEY There are two ways of thinking about money supply – as the physical stock (instruments they are in) or the counterparts (the holders of the money). Physical Stock – Instruments They Are In If you add up the entire stock of money, i.e. in current accounts, on deposit with banks, building societies and so on, it can be shown as Measures of Money Supply, as follows: ∙ M0 – M0 is the narrowest definition of the quantity of money in circulation. The definition used in the UK is bank notes and coins in circulation, plus banks’ deposits with the Bank of England and money in banks’ tills. M0 is also known as the monetary base. This term refers to the fact that the money measured by M0 supplies the base on which other forms of money (such as bank deposits) are based. ∙ M1 – M1 is M0 plus saving accounts or sight deposits held by the private sector in banks and building societies in the UK. Sight deposits are sterling deposits that can be withdrawn on demand or that have been deposited overnight. It excludes non-sterling currencies.

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  Principles of Macroeconomics 3e

  • David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
  • 2022(Publication Date)
  • Openstax

    (Publisher)

  However, $10 that you have in your savings account is not so easy to use. You must go to the bank or ATM machine and withdraw that cash to buy your lunch. Thus, $10 in your savings account is less liquid. The Federal Reserve Bank, which is the central bank of the United States, is a bank regulator and is responsible for monetary policy and defines money according to its liquidity. There are two definitions of money: M1 and M2 money supply. Historically, M1 money supply included those monies that are very liquid such as cash, checkable (demand) deposits, and traveler’s checks, while M2 money supply included those monies that are less liquid in nature; M2 included M1 plus savings and time deposits, certificates of deposits, and money market funds. Beginning in May 2020, the Federal Reserve changed the definition of both M1 and 340 14 • Money and Banking Access for free at openstax.org M2. The biggest change is that savings moved to be part of M1. M1 money supply now includes cash, checkable (demand) deposits, and savings. M2 money supply is now measured as M1 plus time deposits, certificates of deposits, and money market funds. M1 money supply includes coins and currency in circulation—the coins and bills that circulate in an economy that the U.S. Treasury does not hold at the Federal Reserve Bank, or in bank vaults. Closely related to currency are checkable deposits, also known as demand deposits. These are the amounts held in checking accounts. They are called demand deposits or checkable deposits because the banking institution must give the deposit holder his money “on demand” when the customer writes a check or uses a debit card. These items together—currency, and checking accounts in banks—comprise the definition of money known as M1, which the Federal Reserve System measures daily.

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  Principles of Macroeconomics

  • Steven A. Greenlaw, Timothy Taylor(Authors)
  • 2014(Publication Date)
  • Openstax

    (Publisher)

  savings account is not so easy to use. You must go to the bank or ATM machine and withdraw that cash to buy your lunch. Thus, $10 in your savings account is less liquid. The Federal Reserve Bank, which is the central bank of the United States, is a bank regulator and is responsible for monetary policy and defines money according to its liquidity. There are two definitions of money: M1 and M2 money supply. M1 money supply includes those monies that are very liquid such as cash, checkable (demand) deposits, and traveler’s checks M2 money supply is less liquid in nature and includes M1 plus savings and time deposits, certificates of deposits, and money market funds. M1 money supply includes coins and currency in circulation—the coins and bills that circulate in an economy that are not held by the U.S. Treasury, at the Federal Reserve Bank, or in bank vaults. Closely related to currency are checkable deposits, also known as demand deposits. These are the amounts held in checking accounts. They are called demand deposits or checkable deposits because the banking institution must give the deposit holder his money “on demand” when a check is written or a debit card is used. These items together—currency, and checking accounts in banks—make up the definition of money known as M1, which is measured daily by the Federal Reserve System. Traveler’s checks are a also included in M1, but have decreased in use over the recent past. A broader definition of money, M2 includes everything in M1 but also adds other types of deposits. For example, M2 includes savings deposits in banks, which are bank accounts on which you cannot write a check directly, but from which you can easily withdraw the money at an automatic teller machine or bank. Many banks and other financial institutions also offer a chance to invest in money market funds, where the deposits of many individual investors are pooled together and invested in a safe way, such as short-term government bonds.

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  Macroeconomics

  (With Study Guide CD-ROM)

  • Jagdish Handa(Author)
  • 2010(Publication Date)
  • WSPC

    (Publisher)

  near-banks — i.e., those financial institutions in which the deposits perform almost the same role for depositors as similar deposits in commercial banks. Examples of such institutions are savings and loan associations and mutual savings banks in the United States (USA); credit unions, trust companies, and mortgage loan companies in Canada; and building societies in the United Kingdom (UK). The incorporation of such deposits into the measurement of money is designated by the symbols M3, M4, etc., or by M2A (or M2+), M2B (or M2++), etc. However, the definitions of these symbols have not become standardised, so that their definitions remain country specific.

  Financial institutions in the economy

  Financial institutions are firms involved in the process that determines the money supply and interest rates. They also intermediate between the borrowing and lending processes in the economy. In practical terms, financial institutions include the central bank, commercial banks, near-banks such as credit unions, trust companies, brokerage companies, postal banks, pension funds, etc. They do not engage in the production or consumption of commodities but receive funds from some sources and channel them to others (i.e., invests them).

  2.2 Money Supply and Money Stock

  Money is a good, which, just like other goods, is demanded and supplied by the various participants in the economy. There are a number of determinants of the demand and supply of money. The most important of the determinants of money demand are national income, the price level, and interest rates, while that of the money supply is the behavior of the central bank of the country which is given the power to control the money supply and bring about changes in it.

  The equilibrium amount in the market for money specifies the money stock , as opposed to the money supply , which is a behavioral function. These are depicted in Figure 2.1a with the nominal quantity of money M on the horizontal axis and the market interest rate r on the vertical axis. The money supply curve is designated as M s and the money demand curve is designated as M d . The equilibrium quantity of money is . It equals the quantity of money supplied at the equilibrium interest rate . Note that the quantity is strictly speaking not the money supply, which has a curve or a function rather than a single value. However, is the money stock that would be observed in equilibrium.1

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  Monetary Economics

  Policy and its Theoretical Basis

  • Keith Bain, Peter Howells(Authors)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  This stresses the narrow approach to defining money based on the point of view of the creditor and the idea of final settlement of debt. It is obviously important for indi-viduals to know what is acceptable in exchange but this is a matter of national, and sometimes local, practice and might change over time. People also need to know how easily and speedily, and at what cost, they can convert illiquid assets into money and how likely they are to be able to obtain liquid resources through borrowing. For none of this do people need either a formal definition of ‘money’ or an appreciation of how much 'money' exists in the economy. At an individual level, people are seldom prevented from engaging in the exchange of goods because of a lack of money in the sense that we are using it here, although they may be so prevented because of a lack of spending power or by the cost of bor-rowing against their assets or their expected future income. We have seen, however, that things may be different at an aggregate level. Much depends on whether we accept the notion that the authorities could and should operate on the interest rate by attempting to control the stock of money. In this case, we would need a clear idea of what constitutes the money supply and some ability to measure it. If, however, the authorities attempt to control spend-ing directly by adjusting the interest rate, we do not need to define or to measure 'money' even at an aggregate level. We might still choose to attempt to do so but only perhaps as one of a number of indicators of the desirability of adjusting the interest rate. The fact that we might only have a very limited and specific need for a definition of ‘money’ in economics may well influence the definition we use, The meaning of money 16 Pause for thought 1.6 Keynes is widely quoted as having said: ‘In the long run we are all dead'. Is this an accurate quotation? (Hint: check The Tract on Monetary Reform , 1923).

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  The Banks and the Monetary System in the UK, 1959-1971

  • J.E. Wadsworth(Author)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  In particular, let us add, money supply in Britain has to be considered in the environment of UK financial institutions, especially banks. If the money supply is important, it is presumably because of its relationship to aggregate demand. As the Radcliffe Committee put it, the ‘relevance of the availability of funds to the pressure of total demand is what lies behind the supreme importance which is often attached to “the supply of money”’. A clear distinction needs to be drawn between the stock of money and its flow, and until recently attention has been directed almost entirely at the effects of the flow. Today it is being increasingly suggested that attention should be paid to the stock, and in particular to changes in the stock.

  In discussing the money supply, however, a satisfactory definition is a first essential. In one sense an appropriate definition depends upon the context in which money supply is to be considered. If related to aggregate demand, the definition has to be concerned with the spendability of money. Thus it should be associated primarily with money in the sense of something that can be spent immediately, as contrasted with near-money, which is moderately liquid but cannot be used directly for spending by the holder. An example of near-money would be funds deposited with a building society or similar undertaking. Much near-money is readily spendable, though not normally directly or immediately as with currency and most bank deposits, but only after some other operation to turn it into one of those forms. Moroever, as we shall see, if it is turned into spendable money it does not increase the total of final means of payment – that is to say, the ‘active’ money supply.

  In International Financial Statistics , published by the International Monetary Fund, money is by implication defined as currency and bank deposits, the figures for the United Kingdom including balances on deposit as well as current accounts. ‘Quasi-money’ – that is, near-money – is defined generally as ‘time and savings deposits and other liabilities of the monetary system that the user of the data may or may not wish to consider to be money’. Thus it is clearly indicated that any definition of the money supply is subjective, and depends upon the attitudes of users and their intentions. The figures recorded in International Financial Statistics are quite close to those given by the Central Statistical Office in its publication Financial Statistics . This, too, admits that ‘any definition of the money supply is arbitrary’. The Organisation for Economic Cooperation and Development, by implication, has accepted this point, as it was until recently publishing a series for the United Kingdom on a very narrow basis, but has now changed to one based on the Financial Statistics series. This widely accepted definition combines currency in circulation with the public with net deposits by UK residents with the whole of the banking sector,13 including both sterling and non-sterling current and deposit accounts. Table A8

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  India's Economic Prospects - A Macroeconomic And Econometric Analysis

  A Macroeconomic and Econometric Analysis

  • Thampy Mammen(Author)
  • 1999(Publication Date)
  • World Scientific

    (Publisher)

  It is not, in so far as nominal interest is treated, the sum of the real rate of interest and expected rate of inflation. In the formulation of demand for money in real terms, therefore, we may have to subtract the expected rate of inflation from the nominal rate of interest. Klein, in his recent work (1995), has shown that the relationship between the interest rate level and the price level is the Gibson relationship. It states that the levels of the interest rate and a general price index move together (ibid., p. 159). He has provided not only the empirical basis for the Gibson relation but also a theoretical rationale through the process of markup pricing (ibid., pp. 170-172). 6.2. Money Supply Money supply, by narrow definition, consists of currency and demand deposits held by the nonbank public. For over three decades, monetary base or high powered money has been used as a key variable that constrains the money supply. The monetary base is defined as the net monetary liabilities of the government and the central bank (RBI) held by the banks and nonbank public. It is derived from the consolidated balance sheet of the two bodies. It consists of (a) currency held by the public (C) which comprises notes issued by the RBI and a small magnitude of one rupee notes and coins issued by the Treasury, and (b) banks' reserves, which include cash in hand and their deposits with the RBI. The public can obtain currency ultimately only through RBI and the banks. The reserves of the banks are held for meeting any claim on their liability. They are required by the RBI to keep a certain percentage of their deposit liabilities in reserves called cash reserve ratio (CRR). The reserves must also be kept to meet the public withdrawal of cash.

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  Macroeconomic Measurement Versus Macroeconomic Theory

  • Merijn Knibbe(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  These estimates are connected to the national accounts (which use the same economic sectors) using what can veritably be called ‘the macroeconomic formula of everything’. To show this, we will discuss the monthly monetary press release of the ECB. In this release, it distinguishes three kinds of money (M1, M2 and M3) which consist of eight subcategories of money as spelled out in Table 3.3. About the subcategories it states that they are: Monetary liabilities of MFIs and central government (post office, treasury) vis-à-vis non-MFI euro area residents excluding central government. In August 2012, the ECB has amended its statistical measurement of broad money to adjust for repurchase agreement (repo) transactions with central counterparties. The quote shows that the ECB operationalization of money changes when the facts change. And a ‘repurchase agreement’ is a tradeable financial pawn agreement which pawns financial assets instead of consumer durables. This ECB operationalization of ‘money in circulation’ leaves us in the dark about what happened to ‘Deposits with an agreed maturity of more than 2 years’ (longer term saving deposits or more or less Keynes’ ‘savings money’). Loans create deposits, but not all these deposits are included in the M3 monetary aggregate. These long-term deposits are not considered to be part of ‘money in circulation’ as, conceptually, the distinguishing aspect of money is according to the ECB the ability to use it as a means of exchange at short notice and against little cost (ECB 2012a), which is generally not true for longer term save deposits. These long-term deposits are however created in the same way as ‘M3’ deposits: ‘loans create deposits and some of these may be channeled to long-term saving accounts’. Anyway – they are on the balance sheet of MFIs as well as households and non-financial companies

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