Economics
Money Supply Process
The money supply process refers to the various factors and mechanisms that influence the amount of money in circulation within an economy. It involves the actions of central banks, commercial banks, and the public in creating and controlling the supply of money. Changes in the money supply can have significant impacts on inflation, interest rates, and overall economic activity.
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11 Key excerpts on "Money Supply Process"
- Michael Brandl(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
The Money Supply Process 10 10-1 The Money Supply Process 214 10-2 More Changes in the Monetary Base and the Money Supply Multiplier 218 10-3 Changes in Variables of the Money Supply Multiplier and the Great Recession 222 10-4 Conclusion 229 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 214 CHAPTER 2 Sample Design About Money The Money Supply Process In the last two chapters we discussed central banks (Chapter 8) and monetary policy (Chapter 9). Before that we talked about money and the simple deposit multiplier (Chapter 7). In this chapter we want to delve into these issues in more depth. We ended Chapter 7 by look-ing at some of the shortcomings of the simple deposit multiplier. In Chapter 8 we looked at the general idea of how central banks are structured and function, whereas in Chapter 9 we examined the tools used in the conduct monetary policy. Now we want to look more deeply into how central banks, in their conduct of monetary policy, affect the money supply through a multiplier process. While we discuss monetary policy a great deal, remember, central banks do not completely control the Money Supply Process. How fast or slow the money supply changes depends on what depositors, banks, governments, the general public, and others do. We will take a look at the effect all of these have on the Money Supply Process. To do this we need to introduce a new concept: the monetary base. We will then use changes in the monetary base to review how economists measure the effect of changes in monetary policy.
- Michael Brandl(Author)
- 2020(Publication Date)
- Cengage Learning EMEA(Publisher)
10 The Money Supply Process 10-1 The Money Supply Process 226 10-2 More Changes in the Monetary Base and the Money Supply Multiplier 230 10-3 Changes in Variables of the Money Supply Multiplier and the Great Recession 234 10-4 Conclusion 241 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. The Money Supply Process In the last two chapters, we discussed central banks (Chapter 8) and the tools of monetary policy (Chapter 9). Before that, we talked about money and the simple deposit multiplier (Chapter 7). In this chapter, we want to delve into these issues in more depth. We ended Chapter 7 by looking at some of the shortcomings of the simple deposit multiplier. In Chapter 8, we looked at the general idea of how central banks are structured and function, whereas in Chapter 9 we examined the tools used in the conduct monetary policy. Now we want to look more deeply into how central banks, in their conduct of monetary policy, affect the money supply through a multiplier process. While we discuss monetary policy a great deal, remember, central banks do not completely control the Money Supply Process. How fast or slow the money supply changes depends on what depositors, banks, governments, the general public, and others do. We will take a look at the effect all of these have on the Money Supply Process. To do this we need to introduce a new concept: the monetary base. We will then use changes in the monetary base to review how economists measure the effect of changes in monetary policy.
eBook - PDFMonetary Economics
Policy and its Theoretical Basis
- Keith Bain, Peter Howells(Authors)
- 2017(Publication Date)
- Red Globe Press(Publisher)
2 The Money Supply Process 2.1 Introduction 2.2 Bank balance sheets 2.3 The base-multiplier approach to money supply determination 2.4 The flow of funds approach 2.5 The two approaches compared 2.6 Summary 32 35 38 46 48 51 'Central banks almost everywhere usually implement their policies through tight control of money market interest rates. Academic monetary econo-mists almost everywhere discuss monetary policy in terms of the monetary stock. These facts say something about either central bankers or academic monetary economists, or both.' W Poole, ‘Interest rates and the conduct of monetary policy: a comment’, Carnegie-Rochester Series on Public Policy, 34 (1991). 2.1 Introduction In the last chapter we saw that we encounter many problems when trying to define money, especially if we are looking for a definition which actually specifies the assets that should be included rather than simply specifying money's func-tions. However, we also saw that if the authorities wish to conduct any sort of monetary policy they have to decide which assets they are going to monitor, even if this involves a degree of arbitrariness and requires the frequent redrawing of boundaries. In practice, most monetary authorities work with three measures of money. These are the monetary base , and some measure of narrow and broad money. For convenience, these are usually identified by numbers. Starting from the narrow-est measure, M0 is sometimes used to denote the monetary base. This consists only of notes and coin outside the central bank plus banks’ deposits held with the central bank. In April 2006, the Bank of England began paying interest on these deposits with the predictable result that this led to a jump in these holdings and a break in the M0 series. For this reason, the M0 series was discontinued. The size of the monetary base can still be seen, however, by looking at a new series, titled ‘notes and coin and bank reserves’.
- 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.
eBook - ePub- Michael Bowe, Lino Briguglio, James W. Dean(Authors)
- 2014(Publication Date)
- Taylor & Francis(Publisher)
12The Money Supply Process in Two Small Island States: Malta and Cyprus, 1960–1993 *
Joe Falzon
What, then, has determined and will determine the value of the franc? First, the quantity, present and prospective, of the francs in circulation. Second, the amount of purchasing power which it suits the public to hold in that shape The first of these two elements … depends mainly on the loan and budgetary policies of the French Treasury. The second of them depends mainly … on the trust or distrust which the public feel in the prospects of the value of the franc.John Maynard Keynes, A Tract on Monetary Reform (1923)The Money Supply Process is of considerable importance in the economy because of the close relationship between changes in the money supply and changes in real output. Friedman and Schwartz (1963), in their celebrated study of the monetary history of the United States, showed that there exists a positive correlation between the money supply and real output: increases in the total stock of money occurred during expansions, while decreases were witnessed during recessions.Moreover, Sims (1972) showed that the innovations in the money stock preceded the innovations in output. Past changes in real output were unable to predict changes in the money stock. On the other hand, past changes in the money stock could help predict changes in output and in real economic activity. More recently, Stock and Watson (1989), using detrended data concerning the money stock, also present support for the view that movements in the quantity of money help to forecast changes in real output.Becketti and Morris (1992) have investigated the ability of money to predict economic activity after the 1970s. They found that, except during the early 1980s, money has remained a useful indicator of future economic activity. A number of developments in financial markets during the early 1980s changed the relationship between money and future real growth, thereby reducing the ability of money to forecast economic activity. When this period of change is excluded from the analysis, however, the predictive ability of money to forecast real economic activity remains intact.
- Daniel S. Ahearn(Author)
- 2019(Publication Date)
- Columbia University Press(Publisher)
It can be argued that this is indeed the case. The money supply as traditionally defined is made up of private checking account deposits (demand deposits, adjusted) plus cur-rency in circulation outside banks. Demand deposits provide the bulk of the money supply (accounting for $112 billion of a $140.2 bil-lion money supply on December 31, 1959) and are also much more subject to Federal Reserve policy than currency in circulation. Ac-cordingly, it is really the Federal Reserve's influence over the de-mand deposit total which has been called inadequate or even perverse by the critics. A breakdown of the deposit component is possible because several classes of Federal Reserve member banks report the total of demand deposits adjusted they hold in their weekly state-ments of condition. This is true for example of the weekly reporting member banks in New York City and elsewhere in the country. Sub-tracting both these weekly reporting member bank deposits from the 5 We refer here, as the following pages suggest, to the fact that components of the money supply may be appropriately affected by Federal Reserve policy, even though the total is not. But is a broader sense it needs to be noted that many economists (as noted in the latter half of this chapter) would object to Friedman's and Shaw's equation of money supply behavior with monetary pol-icy because this approach leaves out the behavior of interest rates, capital values, and monetary velocity. Thus a charge that monetary policy has acted perversely is surely exaggerated. But it is serious enough if behavior of the money supply is perverse, as Friedman alleges. 218 CONTROL OVER FINANCIAL VARIABLES total demand deposit component of the money supply provides a third segment of the money supply: demand deposits in all other banks. With this breakdown, it is then possible to compare the response of these three segments of the money supply as well as the total to Federal Reserve monetary policy.
eBook - ePubManagement Economics: An Accelerated Approach
An Accelerated Approach
- William G. Forgang, Karl W. Einolf(Authors)
- 2015(Publication Date)
- Routledge(Publisher)
a medium of exchange. The unit of account function means that goods and services are priced in money terms. The medium of exchange function means that goods and services are exchanged for money.Application Box 3.6The nation’s money supply (M1) in November 2005 was $1,372 billion.Source: www.economagic.com.Therefore, one component of the money supply is currency and coins. However, many purchases are completed by writing checks, and dollar balances in checking accounts (demand deposits) are the largest part of the money supply. Checking deposits and currency and coin are the largest components of the M1 definition of money.The Equation of ExchangeOne way to examine the relationship between the money supply and gross domestic product is through the equation of exchange (see Table 3.1 ).The equation of exchange is an identity. On the left side of the equation, the supply of money (M ) is multiplied by the velocity of money (V ). The velocity of money is the average number of times a dollar or deposit is used to complete transactions during a year. For example, assume individuals are paid weekly and spend the full amount before their next pay period. Under these restrictive assumptions, the velocity of money is 52. If individuals are paid monthly and spend the full amount on goods and services prior to the next pay period, the velocity is 12.Table 3.1 Equation of ExchangeMV = PT Where: M = money supply V = velocity of money P = price level T = number of transactions The left side of the equation of exchange is total expenditures. It is the money supply multiplied by the velocity. The right side of the equation is total receipts , which are the average price of goods and services (P ) multiplied by the number of transactions (T
eBook - ePubMacroeconomics
(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 economyFinancial 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 StockMoney 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
eBook - PDFEconomics
Theory and Practice
- Patrick J. Welch, Gerry F. Welch(Authors)
- 2016(Publication Date)
- Wiley(Publisher)
203 CHAPTER OBJECTIVES Explain the relationship between the economy’s money supply and output, employment, and prices. Explain how money is created and destroyed through the loan‐making activities of financial depository institutions. Show how interest rates affect borrowing from financial depository institutions and how they are influenced by changes in excess reserves. Define monetary policy and the major tools for carrying out monetary policy by the Federal Reserve. Show the relationship between government borrowing to cover deficit spending and to assess monetary policy. For any economy, especially one that is on a paper monetary standard, careful control over the size of the money supply is extremely important. There is a strong relation- ship between an economy’s money supply and the economy’s production level, jobs, and overall price changes: Any change in the size of the money supply can change the economy’s overall performance. Because of this relationship, changing the money supply is an important way to reach the economy’s goals of full production and economic growth, full employment, and price stability. Monetary policy, or changing the money supply to address unemployment and inflation, is in the hands of the Federal Reserve. You will learn a lot about how money affects the economy and the critical role interest rates play in economic activity in this chapter. You will also learn the processes for creating and destroying money, the tools that the Federal Reserve uses in its role as overseer and controller of the money supply, and how interest rates are determined and influenced through monetary policy. By the end of this chapter, you will have a good understanding of an area of the macroeconomy that seems mysterious to many Money Creation, Monetary Theory, and Monetary Policy CHAPTER 8 204 Chapter 8 Money Creation, Monetary Theory, and Monetary Policy people but is critical to economic stabilization and growth.
eBook - PDFIndia's Economic Prospects - A Macroeconomic And Econometric Analysis
A Macroeconomic and Econometric Analysis
- Thampy Mammen(Author)
- 1999(Publication Date)
- World Scientific(Publisher)
Chick (1983) points out that there is a revolving fund consisting of consumption and investment spending, and profit and wage income which remain within the banking system as its liability that could finance the existing level of spend-ing. Any higher level of spending in investment or any other spending will necessitate a larger revolving fund that would be met by the banks. (The reason there is a revolving fund is that the short term finance provided by the bank to the producer while goods are being produced will be spent on resources such as labor and returned to the banking system as deposits, with the exception of some leakage into cash or other types of financial as-sets (Wray 1990). Since bank money is created in the process of production or speculation, money supply is the result, rather than the cause, of aggre-gate demand (Roger 1989, p. 175). The reason for the stable relationship between income (Y) and money (M), argues Kaldor, is that the causation runs from Y to M and not from M to Y. New money comes into existence in consequence of, or as an aspect of, the extension of bank credit. (Kaldor 1982, p. 22). Expenditures are financed by credit, which raises the level of the money supply. So money supply is demand-determined. But demand may vary with income, and the Central Bank can effectively influence the level of credit through changes in the bank rate. That, however, does not alter the fact that demand determines the money supply (ibid., p. 24). Supply and Demand for Money 157 The central bank cannot control the monetary base except through changing the bank rate at which it creates bank reserves through lend-ing or discounting. But it cannot refuse to lend to the banks without endangering the solvency of the banking system; they must maintain their function as a lender of the last resort, (ibid., p. 25). Moore makes the same argument: The banks first meet the demand for loans and then meet the legal reserve requirement.
- Richard Coghlan(Author)
- 2014(Publication Date)
- Taylor & Francis(Publisher)
One area in which the MABP is deficient is in its neglect of the process through which the money supply actually comes into existence. Once this is taken into account, the analysis needs to be further qualified. This does not deny that the balance of payments is a monetary phenomenon, nor that the equilibrium conclusions of the international monetarists still hold; what it does do is substantially qualify the adjustment mechanism that has been widely referred to in the literature. This is important because if the monetary approach is to have practical value, it must be capable of describing disequilibrium situations, and the path and timing of any return towards equilibrium.Given the present organisation of the monetary system in the United Kingdom, and in most other countries, the money supply is not controlled directly by restricting the availability of bank reserve assets, but through changing the price at which bank reserves will be supplied. This approach, combined with the political sensitivity of interest-rate movements, means that the domestic contribution to the supply of money will be determined by the quantity of credit (to all customers) provided by the banks. This process was described above for a closed economy. It was emphasised that there is no necessary requirement for the equilibrium demand for money to change by the same amount as the demand for bank credit, and therefore the supply of money, though the motives for demanding bank credit should also result in expenditures (on goods and securities) that will have the effect of raising the demand for money. The speed with which equilibrium is achieved depends critically on the form the expenditures take. This model now needs to be extended to allow for external currency flows influencing the money supply, and adjustment through the balance of payments.The idea that there can be disequilibrium between the demand for and supply of money is not new, and, of course, underlies the monetary approach to the balance of payments. However, there are important implications for this model once we recognise the significance of the demand for credit in determining the money supply, and that there is no need for this to be matched, in the short term, by an equilibrium demand for money, or if it is, only because of the expenditures facilitated by the credit creation. It should be helpful to consider one or two examples. In all cases we start from a position of universal equilibrium, and assume there are no exogenous shifts in real variables (apart from an increase in credit demand).
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