Monetary base: Difference between revisions
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{{Short description|Measure of money supply}} |
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The '''money base''', or the '''monetary base''' is a '''[[government liability]]''', '''[[currency]]''' and '''[[bank reserves]]''' (or "deposits") at the [[central bank]]. |
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{{Expand German|date=January 2024}} |
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{{Use dmy dates|date=May 2024}} |
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{{Public finance}} |
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[[File:Euro monetary base.png|thumb|Euro monetary base]] |
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In [[economics]], the '''monetary base''' (also '''base money''', '''money base''', '''high-powered money''', '''reserve money''', '''outside money''', '''central bank money''' or, in the [[United Kingdom|UK]], '''narrow money''') in a country is the total amount of money created by the central bank. This includes: |
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==Arguments and criticism== |
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It's by some means the amount of (internationally-recognisable) reserves securing the [[money supply]] at a given moment of time. In retrospective, gold was used to determine the money base. |
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* the total [[currency]] circulating in the public, |
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Since the second half of eighties the notion of amorphous "reserves" underlying the money base was consistently presented as an axiom-type statement, which, however contradicts the actual incidents underlying the separation of current [[monetary system]] from gold. |
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* plus the currency that is physically held in the [[bank vault|vaults]] of [[commercial bank]]s, |
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* plus the [[commercial bank|commercial banks']] [[bank reserves|reserves]]<ref>See, e.g., U.S. Federal Reserve System regulations at 12 C.F.R. section 204.5(a)(1) and 12 C.F.R. section 204.2.</ref> held in the [[central bank]].<ref>See, e.g., U.S. Federal Reserve System regulation at 12 C.F.R. section 204.5(a)(1)(i).</ref> |
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The monetary base should not be confused with the [[money supply]], which consists of the total [[currency]] circulating in the public plus certain types of non-bank deposits with [[commercial bank]]s. |
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Many economists fear that money base is increasingly diluted, thus the quantifieable "reserves" in the world monetary system today are in essence amount of (mostly) unsecured debt. |
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==Management== |
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Please refer to economic discussions relating to [[gold standard]] and the system of world currencies for further information about money base - dependencies/trends |
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[[File:US monetary base - Updated.png|alt=|left|thumb|U.S. Monetary base]] |
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[[File:Money supply Euro.png|thumb|Base money of the Euro zone and money supplies M1, M2 and M3, and euro zone GDP from 1980–2021. Logarithmic scale.]] |
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[[Open market operation]]s are [[monetary policy]] tools which directly expand or contract the monetary base. |
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The monetary base is manipulated during the conduct of monetary policy by a [[finance ministry]] or the central bank. These institutions change the monetary base through open market operations: the buying and selling of government bonds. For example, if they buy government bonds from commercial banks, they pay for them by adding new amounts to the banks’ reserve deposits at the central bank, the latter being a component of the monetary base. |
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Typically, a central bank can also influence banking activities by manipulating interest rates and setting [[reserve requirements]] (how much money banks must keep on hand instead of loaning out to borrowers). Interest rates, especially on [[federal funds]] (ultra-short-term loans between banks), are themselves influenced by open market operations. |
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The monetary base has traditionally been considered '''high-powered''' because its increase will typically result in a much larger increase in the supply of [[demand deposit]]s through banks' loan-making, a ratio called the [[money multiplier]].<ref name="Mankiw">{{citation |last=Mankiw |first=N. Gregory |title=Macroeconomics |publisher=Worth |year=2002 |edition=5th |pages=482–489 |chapter=Chapter 18: Money Supply and Money Demand }}</ref> However, for those that do not agree with the theory of the money multiplier, the monetary base can be thought of as high powered because of the [[fiscal multiplier]] instead. |
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==Monetary policy== |
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{{Original research section|date=February 2022}} |
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[[Monetary policy]] is generally presumed to be the policy preserve of reserve banks, who target an interest rate. If control of the amount of base money in the economy is lost due failure by the reserve bank to meet the reserve requirements of the banking system, banks who are short of reserves will bid up the interest rate. Interest rates are set by the reserve bank to maintain an inflation rate which is considered neither too high or too low. This is usually determined using a Taylor Rule. |
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The quantity of reserves in the banking system is supported by the open market operations performed by the reserve banks, involving the purchase and sale of various financial instruments, commonly government debt (bonds), usually using "repos". Banks only require enough reserves to facilitate interbank settlement processes. |
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In some countries, reserve banks now pay interest on reserves. This adds another lever to the interest rate control mechanisms available to the reserve bank. |
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Following the 2008 financial crisis, quantitative easing raised the amount of reserves in the banking system, as reserve banks purchased bad debt from the banks, paying for it with reserves. This has left the banking system with an oversupply of reserves. This increase in reserves has had no effect on the level of interest rates. Reserves are never lent out by banks. |
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== Accounting == |
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Following [[International Financial Reporting Standards|IFRS]] standards, base money is registered as a liability of the central banks' balance sheet,<ref>{{Cite journal|last1=Archer|first1=David|last2=Moser-Boehm|first2=Paul|date=2013-04-29|title=Central bank finances|url=https://www.bis.org/publ/bppdf/bispap71.htm|language=en}}</ref> implying base money is by nature a debt from the central bank. However, given the special nature of central bank money – which cannot be redeemed in anything other than base money – numerous scholars such as [[Michael Kumhof]] have argued it should rather be recorded as a form of equity.<ref>{{Cite journal|last1=Kumhof|first1=Michael|last2=Allen|first2=Jason G.|last3=Bateman|first3=Will|last4=Lastra|first4=Rosa M.|last5=Gleeson|first5=Simon|last6=Omarova|first6=Saule T.|date=2020-11-14|title=Central Bank Money: Liability, Asset, or Equity of the Nation?|url=https://papers.ssrn.com/abstract=3730608|language=en|location=Rochester, NY|ssrn=3730608 }}</ref> |
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==See also== |
==See also== |
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*[[Money |
*[[Money creation]] |
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*[[Monetary reform]] |
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*[[Fractional reserve banking]] |
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*[[Credit theory of money]] |
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*[[Broad money]] |
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==References== |
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{{Reflist}} |
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==External links== |
==External links== |
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* {{Cite book |
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*Data |
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| last = Brunner |
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| ⚫ | |||
| first = Karl |
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*Articles |
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| author-link = Karl Brunner (economist) |
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**[http://www.hussmanfunds.com/html/fedirrel.htm Why the Federal Reserve is Irrelevant By John P. Hussman, Ph.D. August 2001] |
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| editor = Newman, Peter K. |editor2=Eatwell, John |editor3=Palgrave, Robert Harry Inglis |editor4=Milgate, Murray |
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| title = The New Palgrave Dictionary of Economics |
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| publisher = Macmillan |
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| location=New York |
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| year = 1987 |
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| url = http://www.dictionaryofeconomics.com/article?id=pde1987_X001039 |
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| chapter = High-powered money and the monetary base |
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| page = 1 |
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| isbn=0-935859-10-1 |
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| doi = 10.1057/9780230226203.2726 |
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| access-date = 8 February 2011 |
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}} |
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* {{Cite book |
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| last = Goodhart |
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| first = Charles |
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| author-link = Charles Goodhart |
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| editor = Newman, Peter K. |editor2=Eatwell, John |editor3=Palgrave, Robert Harry Inglis |editor4=Milgate, Murray |
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| title = The New Palgrave Dictionary of Economics |
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| publisher = Macmillan |
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| location=New York |
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| year = 1987 |
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| url = http://www.dictionaryofeconomics.com/article?id=pde1987_X001483 |
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| chapter = Monetary base |
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| page = 1 |
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| isbn=0-935859-10-1 |
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| doi = 10.1057/9780230226203.3102 |
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| access-date = 8 February 2011 |
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}} |
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* {{Cite book |
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| last = Cagan |
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| first = Phillip |
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| author-link = Phillip Cagan |
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| title = Determinants and Effects of Changes in the Stock of Money, 1875-1960 |
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| publisher = National Bureau of Economic Research |
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| location = Cambridge, Massachusetts |
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| year = 1965 |
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| url = https://www.nber.org/chapters/c1642.pdf |
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| chapter = High-Powered Money |
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| pages = 45–117 |
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| isbn = 0-87014-097-3 |
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| access-date = 8 February 2011 |
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}} |
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| ⚫ | |||
{{Authority control}} |
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[[Category:Monetary economics]] |
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[[Category:Operations of central banks]] |
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Latest revision as of 00:29, 13 November 2024
 | You can help expand this article with text translated from the corresponding article in German. (January 2024) Click [show] for important translation instructions.
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| Public finance |
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In economics, the monetary base (also base money, money base, high-powered money, reserve money, outside money, central bank money or, in the UK, narrow money) in a country is the total amount of money created by the central bank. This includes:
- the total currency circulating in the public,
- plus the currency that is physically held in the vaults of commercial banks,
- plus the commercial banks' reserves[1] held in the central bank.[2]
The monetary base should not be confused with the money supply, which consists of the total currency circulating in the public plus certain types of non-bank deposits with commercial banks.
Management
[edit]
Open market operations are monetary policy tools which directly expand or contract the monetary base.
The monetary base is manipulated during the conduct of monetary policy by a finance ministry or the central bank. These institutions change the monetary base through open market operations: the buying and selling of government bonds. For example, if they buy government bonds from commercial banks, they pay for them by adding new amounts to the banks’ reserve deposits at the central bank, the latter being a component of the monetary base.
Typically, a central bank can also influence banking activities by manipulating interest rates and setting reserve requirements (how much money banks must keep on hand instead of loaning out to borrowers). Interest rates, especially on federal funds (ultra-short-term loans between banks), are themselves influenced by open market operations.
The monetary base has traditionally been considered high-powered because its increase will typically result in a much larger increase in the supply of demand deposits through banks' loan-making, a ratio called the money multiplier.[3] However, for those that do not agree with the theory of the money multiplier, the monetary base can be thought of as high powered because of the fiscal multiplier instead.
Monetary policy
[edit] | This section possibly contains original research. (February 2022) |
Monetary policy is generally presumed to be the policy preserve of reserve banks, who target an interest rate. If control of the amount of base money in the economy is lost due failure by the reserve bank to meet the reserve requirements of the banking system, banks who are short of reserves will bid up the interest rate. Interest rates are set by the reserve bank to maintain an inflation rate which is considered neither too high or too low. This is usually determined using a Taylor Rule. The quantity of reserves in the banking system is supported by the open market operations performed by the reserve banks, involving the purchase and sale of various financial instruments, commonly government debt (bonds), usually using "repos". Banks only require enough reserves to facilitate interbank settlement processes. In some countries, reserve banks now pay interest on reserves. This adds another lever to the interest rate control mechanisms available to the reserve bank. Following the 2008 financial crisis, quantitative easing raised the amount of reserves in the banking system, as reserve banks purchased bad debt from the banks, paying for it with reserves. This has left the banking system with an oversupply of reserves. This increase in reserves has had no effect on the level of interest rates. Reserves are never lent out by banks.
Accounting
[edit]Following IFRS standards, base money is registered as a liability of the central banks' balance sheet,[4] implying base money is by nature a debt from the central bank. However, given the special nature of central bank money – which cannot be redeemed in anything other than base money – numerous scholars such as Michael Kumhof have argued it should rather be recorded as a form of equity.[5]
See also
[edit]References
[edit]- ^ See, e.g., U.S. Federal Reserve System regulations at 12 C.F.R. section 204.5(a)(1) and 12 C.F.R. section 204.2.
- ^ See, e.g., U.S. Federal Reserve System regulation at 12 C.F.R. section 204.5(a)(1)(i).
- ^ Mankiw, N. Gregory (2002), "Chapter 18: Money Supply and Money Demand", Macroeconomics (5th ed.), Worth, pp. 482–489
- ^ Archer, David; Moser-Boehm, Paul (29 April 2013). "Central bank finances".
{{cite journal}}: Cite journal requires|journal=(help) - ^ Kumhof, Michael; Allen, Jason G.; Bateman, Will; Lastra, Rosa M.; Gleeson, Simon; Omarova, Saule T. (14 November 2020). "Central Bank Money: Liability, Asset, or Equity of the Nation?". Rochester, NY. SSRN 3730608.
{{cite journal}}: Cite journal requires|journal=(help)
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 (eds.). The New Palgrave Dictionary of Economics. New York: Macmillan. p. 1. doi:10.1057/9780230226203.2726. ISBN 0-935859-10-1. Retrieved 8 February 2011.
- Goodhart, Charles (1987). "Monetary base". In Newman, Peter K.; Eatwell, John; Palgrave, Robert Harry Inglis; Milgate, Murray (eds.). The New Palgrave Dictionary of Economics. New York: Macmillan. p. 1. doi:10.1057/9780230226203.3102. ISBN 0-935859-10-1. Retrieved 8 February 2011.
- Cagan, Phillip (1965). "High-Powered Money". Determinants and Effects of Changes in the Stock of Money, 1875-1960 (PDF). Cambridge, Massachusetts: National Bureau of Economic Research. pp. 45–117. ISBN 0-87014-097-3. Retrieved 8 February 2011.
- Aggregate Reserves Of Depository Institutions And The Monetary Base (H.3)
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