Monetary base
In economics, the monetary base (also base money, money base, high-powered money, reserve money, or, in the UK, narrow money) is a term relating to (but not being equivalent to) the money supply (or money stock), the amount of money in the economy. The monetary base is highly liquid money that consists of coins, paper money (both as bank vault cash and as currency circulating in the public), and commercial banks' reserves with the central bank.[1] Measures of money are typically classified as levels of M, where the monetary base is smallest and lowest M-level: M0. Base money can be described as the most acceptable (or liquid) form of final payment. Broader measures of the money supply also include money that does not count as base money, such as demand deposits (included in M1), and other deposit accounts like the less liquid savings accounts (included in M2) etc.
(The narrow money supply is an earlier term used in the U.S to describe currency held by the non-bank public and demand deposits of banks, M1).
Management
"Open market operations" are monetary policy tools that affect directly the monetary base; the monetary base can be expanded or contracted using an expansionary policy or a contractionary policy, but not without risk.
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 print currency and release it into the economy, or withdraw it from the economy, 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) is allowed to be multiply magnified in terms of the supply of bank money, an effect often referred to as the money multiplier. As an example, an increase of 1 billion currency units in the monetary base will allow (and often be correlated to) an increase of many more billions in the "bank money" supply. This is often discussed in conjunction with fractional-reserve banking banking systems.
References
External links
See also
External links
- Karl Brunner (1987). "high-powered money and the monetary base," The New Palgrave: A Dictionary of Economics, v. 2, pp. 654-55. Reprinted in Eatwell et al. Money: New Palgrave, pp. 75-78.
- Phillip Cagan (1965). Determinants and Effects of Changes in the Stock of Money, 1875-1960. NBER. Chapter 3 (link), "High-Powered Money," pp. 45-117.
- Charles Goodhart (1987). "monetary base," The New Palgrave: A Dictionary of Economics, v. 2, pp. 654-55.
- Aggregate Reserves Of Depository Institutions And The Monetary Base (H.3)
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