money supply

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Money supply

Money Supply

A measure of the total amount and value of money in an economy. There are various ways of calculating the money supply. The most conservative includes only currency in circulation and instruments that can be converted to currency on demand (e.g. the amount in a checking account). Other calculations are much broader and include comparatively illiquid assets, such as money market funds. Central banks control the money supply in their own countries. See also: M0, M1, M2, M3, M4.

money supply

The amount of money in the economy. Since the money supply is considered by many to be a critical element in determining economic activity, the financial markets attach great importance to Federal Reserve reports of changes in the supply. For example, consistently large increases in the money supply bring fears of future inflation. There are a variety of measures of the supply of money depending on how strictly it is defined. Also called money stock. See also M1, M2, M3, monetarism.

Money supply.

The money supply is the total amount of liquid or near-liquid assets in the economy.

The Federal Reserve, or the Fed, manages the money supply, trying to prevent either recession or serious inflation by changing the amount of money in circulation.

The Fed increases the money supply by buying government bonds in the open market, and decreases the supply by selling these securities.

In addition, the Fed can adjust the reserves that banks must maintain, and increase or decrease the rate at which banks can borrow money. This fluctuation in rates gets passed along to consumers and investors as changes in short-term interest rates.

The money supply is grouped into four classes of assets, called money aggregates. The narrowest, called M1, includes currency and checking deposits. M2 includes M1, plus assets in money market accounts and small time deposits.

M3, also called broad money, includes M2, plus assets in large time deposits, eurodollars, and institution-only money market funds. The biggest group, L, includes M3, plus assets such as private holdings of US savings bonds, short-term US Treasury bills, and commercial paper.

money supply

the stock of MONEY in an economy. The money supply can be specified in a variety of ways: narrow definitions of the money supply include only a limited number of assets, while broader definitions extend the range of assets included; for example, the ‘M0’ (narrow) money supply comprises currency (notes and coins), COMMERCIAL BANKS' till money and their operational balances at the Bank of England; ‘M3’ (broad) money supply is made up of M0 plus sight and time deposits with the commercial banks and UK public sector sterling deposits; and ‘M4’ is made up of M3 plus deposits with the building societies.

The size of the money supply is an important determinant of the level of spending in the economy and its control is a particular concern of MONETARY POLICY. However, the monetary authorities have a problem because given the number of possible definitions of the money supply, it is difficult for them to decide which is the most appropriate money supply category to target for control purposes. Moreover, having targeted a particular definition they face the added difficulty of actually controlling it because of the potential for asset switching from one category of money to another.

For most of the 1980s the authorities targeted M3 for control purposes, but in recent years have switched to M0 and M4 as ‘indicators’ of monetary conditions in setting ‘official’ INTEREST RATES (see MONETARY POLICY COMMITTEE). See LEGAL TENDER.

money supply

the amount of MONEY in circulation in an economy. Money supply can be specified in a variety of ways (see Fig. 127 ), and the total value of money in circulation depends on which definition of the money supply is adopted. ‘Narrow’ definitions of the money supply include only assets possessing ready LIQUIDITY (that is, assets that can be used directly to finance a transaction - for example, notes and coins). ‘Broad’ definitions include other assets that are less liquid but are nonetheless important in underpinning spending (for example, many building society deposits have first to be withdrawn and ‘converted’ into notes and coins before they can be spent).

The size of the money supply is an important determinant of the level of spending in the economy, and its control is a particular concern of MONETARY POLICY. The monetary authorities have a problem, however, because, given the number of possible definitions of the money supply, it is difficult for them to decide which is the most appropriate money supply category to target for control purposes. Moreover, having targeted a particular definition, they face the added difficulty of actually controlling it because of the potential for asset-switching from one category of money to another. For example, if the authorities target M3 (mainly currency plus bank deposits) for control purposes, this may not be sufficient in itself to reduce spending. Spenders may simply use their building society deposits (M4 type money) or national savings (M5 type money) to finance current purchases.

In the 1980s the UK government, as part of its MEDIUM-TERM FINANCIAL STRATEGY, set ‘target bands’ for the growth of, initially, sterling M3 and later M0. In recent years, formal targeting of the money supply has been abandoned, although the authorities have continued to ‘monitor’ M0, together with M4, as ‘indicators’ of general monetary conditions in the economy in setting ‘official’ INTEREST RATES (see MONETARY POLICY COMMITTEE). See LEGAL TENDER.

References in periodicals archive ?
The association between money stock growth and inflation is illustrated in Figure 4, where we plot the growth rate of Ml, a narrow monetary aggregate, alongside the inflation rate.
We assert that neither the trend nor the variability of money stock growth, inflation, or the unemployment rate during the late 1960s and the 1970s reflected a well-designed monetary policy.
This instrument, which is often used in industrialized countries, steers directly the money stock and, thus, influences demand for credit by the private sector.
In the case of an open market policy, the Central Bank buys or sells treasury notes or bonds, as well as local government treasury bonds, directly on the market and, thus, influences the money stock held by the private sector.
The important effect of the growth of the money stock is underscored in his assessment of the revival from the 1937-38 depression: "The principal force for recovery from the 1937-38 recession came from the decline in prices that raised the real value of the money stock and, later from the rise in the nominal money stock" (574).
In sum, the widely accepted present view that gold-flow-induced growth of the money stock drove the recovery after the spring 1933 trough appears to be a robust conclusion.
For the analysis of the monetary policy planning problem, it is convenient to define monetary policy in terms of the money stock normalized relative to the preset nominal prices,
These initial long-term deposits are exactly the initial money stock of the current period.
In addition, the growth of the money stock was considered a good alternative to short-term rates as an intermediate target because it was published weekly and was thought to have a stable long-run relation to inflation.
However, of primary interest is the systematic difference in the money stocks between the two economic systems.
Since the policy rule in the previous section is based on controlling the monthly-average money stocks it would appear that the data are at the present time available with a short enough lag that feedback methods of control are feasible.
Figure 12 shows that the growth of the real money stock also declined relative to its long-run average, especially in 1929.