Monetary base
In economics, the monetary base (also base money, money base, high-powered money, reserve money, or, in the UK, narrow money) is defined as the sum of currency circulating in the public and commercial banks' reserves with the central bank.
The monetary base must not be confused with the money supply which consists of currency circulating in the public and non-bank deposits with commercial banks. Normally, the money supply excceds the monetary base by far; the ratio of the two is referred to as the money multiplier. If one excludes currency from the definitions, the monetary base is not a subset of the money supply - rather, the two are disjoint sets. On the commercial banks' balance sheets, the former belongs to the assets whereas the latter belongs to the liabilities.
Management [edit]
"Open market operations" are monetary policy tools that affect directly the monetary base; the monetary base can be expanded or contracted using an expansionary monetary policy or a contractionary monetary policy.
The monetary base is typically controlled by the institution in a country that controls monetary policy. This is usually either the finance ministry or the central bank. These institutions change the monetary base through open market transactions (i.e., the buying and selling of government bonds). These institutions also typically have the ability to influence banking activities by manipulating interest rates and changing bank reserve requirements (how much money banks must keep on hand instead of loaning out to borrowers).
The monetary base is called high-powered because an increase in the monetary base (M0) will typically result in a much larger increase in the supply of demand deposits through banks' loan-making activities (an effect often referred to as the money multiplier.)[1]
- ^ Mankiw, N. Gregory (2002), "Chapter 18: Money Supply and Money Demand", Macroeconomics (5th ed.), Worth, pp. 482–489
See also [edit]
External links [edit]
- Brunner, Karl (1987). "High-powered money and the monetary base". In Newman, Peter K.; Eatwell, John; Palgrave, Robert Harry Inglis; Milgate, Murray. The New Palgrave Dictionary of Economics. New York: Macmillan. doi:10.1057/9780230226203.2726. ISBN 0-935859-10-1. Retrieved 08 February 2011.
- Goodhart, Charles (1987). "Monetary base". In Newman, Peter K.; Eatwell, John; Palgrave, Robert Harry Inglis; Milgate, Murray. The New Palgrave Dictionary of Economics. New York: Macmillan. doi:10.1057/9780230226203.3102. ISBN 0-935859-10-1. Retrieved 08 February 2011.
- Cagan, Phillip (1965). "High-Powered Money". Determinants and Effects of Changes in the Stock of Money, 1875-1960. Cambridge, Massachusetts: National Bureau of Economic Research. pp. 45–117. ISBN 0-87014-097-3. Retrieved 08 February 2011.
- Aggregate Reserves Of Depository Institutions And The Monetary Base (H.3)
