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In macroeconomics, the money supply (or money stock) refers to the total volume of money held by the public at a particular point in time in an economy. There are several ways to define "money", but standard measures usually include Circulation (currency), currency in circulation and demand deposits (depositors' easily accessed assets on the books of financial institutions). The central bank of each country may use a definition of what constitutes money for its purposes. Money supply data is recorded and published, usually by the government or the central bank of the country. Public sector, Public and private sector analysts monitor changes in the money supply because of the belief that such changes affect the price levels of Security (finance), securities, inflation, the exchange rates, and the business cycle. The relationship between money and prices has historically been associated with the quantity theory of money. There is strong empirical evidence of a direct relationship between the growth of the money supply and long-term price inflation, at least for rapid increases in the amount of money in the economy. For example, a country such as Zimbabwe which saw extremely rapid increases in its money supply also saw extremely rapid increases in prices (hyperinflation). This is one reason for the reliance on monetary policy as a means of controlling inflation.

# Money creation by commercial banks

Commercial banks play a role in the process of money creation, under the fractional-reserve banking system used throughout the world. In this system, demand deposit, credit is created whenever a bank gives out a new loan and destroyed when the borrower pays back the principal on the loan. This new money, in net terms, makes up the non-M0 component in the M1-M3 statistics. In short, there are two types of money in a fractional-reserve banking system: * central bank money — obligations of a central bank, including currency and central bank depository accounts * commercial bank money — obligations of commercial banks, including checking accounts and savings accounts. In the money supply statistics, central bank money is MB while the commercial bank money is divided up into the M1-M3 components. Generally, the types of commercial bank money that tend to be valued at lower amounts are classified in the narrow category of M1 while the types of commercial bank money that tend to exist in larger amounts are categorized in M2 and M3, with M3 having the largest. In the United States, a bank's reserves consist of U.S. currency held by the bank (also known as "vault cash") plus the bank's balances in Federal Reserve accounts. For this purpose, cash on hand and balances in Federal Reserve ("Fed") accounts are interchangeable (both are obligations of the Fed). Reserves may come from any source, including the Federal funds, federal funds market, deposits by the public, and borrowing from the Fed itself.

# Open market operations by central banks

Central banks can influence the money supply by open market operations. They can increase the money supply by purchasing government securities, such as government bonds or treasury bills. This increases the liquidity in the banking system by converting the illiquid securities of commercial banks into liquid deposits at the central bank. This also causes the price of such securities to rise due to the increased demand, and interest rates to fall. These funds become available to commercial banks for lending, and by the multiplier effect from fractional-reserve banking, loans and bank deposits go up by many times the initial injection of funds into the banking system. In contrast, when the central bank "tightens" the money supply, it sells securities on the open market, drawing liquid funds out of the banking system. The prices of such securities fall as supply is increased, and interest rates rise. This also has a multiplier effect. This kind of activity reduces or increases the supply of short term government debt in the hands of banks and the non-bank public, also lowering or raising interest rates. In parallel, it increases or reduces the supply of loanable funds (money) and thereby the ability of private banks to issue new money through issuing debt. The simple connection between monetary policy and monetary aggregates such as M1 and M2 changed in the 1970s as the reserve requirements on deposits started to fall with the emergence of money funds, which require no reserves. At present, reserve requirements apply only to "transactions deposits" – essentially checking accounts. The vast majority of funding sources used by private banks to create loans are not limited by bank reserves. Most commercial and industrial loans are financed by issuing large denomination Certificate of deposit, CDs. Money market deposits are largely used to lend to corporations who issue commercial paper. Consumer loans are also made using Savings account, savings deposits, which are not subject to reserve requirements. This means that instead of the value of loans supplied responding passively to monetary policy, we often see it rising and falling with the demand for funds and the willingness of banks to lend. Some economists argue that the money multiplier is a meaningless concept, because its relevance would require that the money supply be exogeny, exogenous, i.e. determined by the monetary authorities via open market operations. If central banks usually target the shortest-term interest rate (as their policy instrument) then this leads to the money supply being Exogenous and endogenous variables, endogenous. Neither commercial nor consumer loans are any longer limited by bank reserves. Nor are they directly linked proportional to reserves. Between 1995 and 2008, the value of consumer loans has steadily increased out of proportion to bank reserves. Then, as part of the financial crisis, bank reserves rose dramatically as new loans shrank. In recent years, some academic economists renowned for their work on the implications of rational expectations have argued that open market operations are irrelevant. These include Robert Lucas Jr., Thomas Sargent, Neil Wallace, Finn E. Kydland, Edward C. Prescott and Scott Freeman. Keynesian economists point to the ineffectiveness of open market operations in 2008 in the United States, when short-term interest rates went as low as they could go in nominal terms, so that no more monetary stimulus could occur. This zero bound problem has been called the liquidity trap or "pushing on a string" (the pusher being the central bank and the string being the real economy).

# Empirical measures in the United States Federal Reserve System

Federal Reserve, November 10, 2005, revised March 9, 2006.
However, there are still estimates produced by various private institutions. * MZM: Money with zero maturity. It measures the supply of financial assets redeemable at par on demand. Velocity of money, Velocity of MZM is historically a relatively accurate predictor of inflation. The ratio of a pair of these measures, most often M2 / M0, is called the money multiplier.

# Definitions of "money"

## Oceania

### Australia

The Reserve Bank of Australia defines the monetary aggregates as: * M1: currency in circulation plus bank current deposits from the private non-bank sector * M3: M1 plus all other bank deposits from the private non-bank sector, plus bank certificate of deposits, less inter-bank deposits * Broad money: M3 plus borrowings from the private sector by NBFIs, less the latter's holdings of currency and bank deposits * Money base: holdings of notes and coins by the private sector plus deposits of banks with the Reserve Bank of Australia (RBA) and other RBA liabilities to the private non-bank sector.

### New Zealand

The Reserve Bank of New Zealand defines the monetary aggregates as: * M1: notes and coins held by the public plus chequeable deposits, minus inter-institutional chequeable deposits, and minus central government deposits * M2: M1 + all non-M1 call funding (call funding includes overnight money and funding on terms that can of right be broken without break penalties) minus inter-institutional non-M1 call funding * M3: the broadest monetary aggregate. It represents all New Zealand dollar funding of M3 institutions and any Reserve Bank repos with non-M3 institutions. M3 consists of notes & coin held by the public plus NZ dollar funding minus inter-M3 institutional claims and minus central government deposits

## South Asia

### India

The Reserve Bank of India defines the monetary aggregates as: * Reserve money (M0): Currency in circulation, plus bankers' deposits with the RBI and 'other' deposits with the RBI. Calculated from net RBI credit to the government plus RBI credit to the commercial sector, plus RBI's claims on banks and net foreign assets plus the government's currency liabilities to the public, less the RBI's net non-monetary liabilities. M0 outstanding was 30.297 trillion as on March 31, 2020. * M1: Currency with the public plus deposit money of the public (demand deposits with the banking system and 'other' deposits with the RBI). M1 was 184 per cent of M0 in August 2017. * M2: M1 plus savings deposits with post office savings banks. M2 was 879 per cent of M0 in August 2017. * M3 (the broad concept of money supply): M1 plus time deposits with the banking system, made up of net bank credit to the government plus bank credit to the commercial sector, plus the net foreign exchange assets of the banking sector and the government's currency liabilities to the public, less the net non-monetary liabilities of the banking sector (other than time deposits). M3 was 555 per cent of M0 as on March 31, 2020(i.e. 167.99 trillion.) * M4: M3 plus all deposits with post office savings banks (excluding National Savings Certificates (India), National Savings Certificates).

## Monetary exchange equation

The money supply is important because it is linked to inflation by the equation of exchange in an equation proposed by Irving Fisher in 1911: : $M\times V = P\times Q$ where * $M$ is the total dollars in the nation's money supply, * $V$ is the number of times per year each dollar is spent (velocity of money), * $P$ is the average price of all the goods and services sold during the year, * $Q$ is the quantity of assets, goods and services sold during the year. In mathematical terms, this equation is an Identity (mathematics), identity which is true by definition rather than describing economic behavior. That is, velocity is defined by the values of the other three variables. Unlike the other terms, the velocity of money has no independent measure and can only be estimated by dividing by . Monetarism, Some adherents of the quantity theory of money assume that the velocity of money is stable and predictable, being determined mostly by financial institutions. If that assumption is valid then changes in can be used to predict changes in . If not, then a model of is required in order for the equation of exchange to be useful as a macroeconomics model or as a predictor of prices. Most macroeconomists replace the equation of exchange with equations for the demand for money which describe more regular and predictable economic behavior. However, predictability (or the lack thereof) of the velocity of money is equivalent to predictability (or the lack thereof) of the demand for money (since in equilibrium real money demand is simply ). Either way, this unpredictability made policy-makers at the Federal Reserve rely less on the money supply in steering the U.S. economy. Instead, the policy focus has shifted to interest rates such as the fed funds rate. In practice, macroeconomists almost always use real GDP to define , omitting the role of all transactions except for those involving newly produced goods and services (i.e., consumption goods, investment goods, government-purchased goods, and exports). But the original quantity theory of money did not follow this practice: was the monetary value of all new transactions, whether of real goods and services or of paper assets. The monetary value of assets, goods, and services sold during the year could be grossly estimated using nominal Gross domestic product, GDP back in the 1960s. This is not the case anymore because of the dramatic rise of the number of financial transactions relative to that of real transactions up until 2008. That is, the total value of transactions (including purchases of paper assets) rose relative to nominal GDP (which excludes those purchases). Ignoring the effects of monetary growth on real purchases and velocity, this suggests that the growth of the money supply may cause different kinds of inflation at different times. For example, rises in the U.S. money supplies between the 1970s and the present encouraged first a rise in the inflation rate for newly-produced goods and services ("inflation" as usually defined) in the 1970s and then asset price inflation, asset-price inflation in later decades: it may have encouraged a stock market boom in the 1980s and 1990s and then, after 2001, a rise in home prices, i.e., the famous housing bubble. This story, of course, assumes that the amounts of money were the causes of these different types of inflation rather than being endogenous results of the economy's dynamics. When home prices went down, the Federal Reserve kept its loose monetary policy and lowered interest rates; the attempt to slow price declines in one asset class, e.g. real estate, may well have caused prices in other asset classes to rise, e.g. commodities.

## Rates of growth

In terms of percentage changes (to a close approximation, under low growth rates), the percentage change in a product, say , is equal to the sum of the percentage changes ). So, denoting all percentage changes as per unit of time, : This equation rearranged gives the basic inflation identity: : Inflation (%ΔP) is equal to the rate of money growth (%Δ), plus the change in velocity (%Δ), minus the rate of output growth (%Δ). So if in the long run the growth rate of velocity and the growth rate of real GDP are exogenous variable, exogenous constants (the former being dictated by changes in payment institutions and the latter dictated by the growth in the economy’s productive capacity), then the monetary growth rate and the inflation rate differ from each other by a fixed constant. As before, this equation is only useful if %Δ follows regular behavior. It also loses usefulness if the central bank lacks control over %Δ.

# Arguments

Historically, in Europe, the main function of the central bank is to maintain low inflation. In the USA the focus is on both inflation and unemployment. These goals are sometimes in conflict (according to the Phillips curve). A central bank may attempt to do this by artificially influencing the demand for goods by increasing or decreasing the nation's money supply (relative to trend), which lowers or raises interest rates, which stimulates or restrains spending on goods and services. An important debate among economists in the second half of the 20th century concerned the central bank's ability to predict how much money should be in circulation, given current employment rates and inflation rates. Economists such as Milton Friedman believed that the central bank would always get it wrong, leading to wider swings in the economy than if it were just left alone. This is why they advocated a non-interventionist approach: one of targeting a pre-specified path for the money supply independent of current economic conditions, even though in practice this might involve regular intervention with open market operations (or other monetary-policy tools) to keep the money supply on target. The former Chairman of the US Federal Reserve, Ben Bernanke, suggested in 2004 that over the preceding 10 to 15 years, many modern central banks became relatively adept at manipulation of the money supply, leading to a smoother business cycle, with recessions tending to be smaller and less frequent than in earlier decades, a phenomenon termed "The Great Moderation"Speech, Bernanke – The Great Moderation
Federal Reserve Bank (February 20, 2004).
This theory encountered criticism during the global financial crisis of 2008–2009. Furthermore, it may be that the functions of the central bank need to encompass more than the shifting up or down of interest rates or bank reserves: these tools, although valuable, may not in fact moderate the volatility of money supply (or its velocity).

# Impact of digital currencies and possible transition to a cashless society

* ''A Program for Monetary Reform'' * American Monetary Institute * Bank regulation * Capital requirement * Central bank * Chartalism * Chicago plan * The Chicago Plan Revisited * Committee on Monetary and Economic Reform * Core inflation * Debt levels and flows * Economics terminology that differs from common usage * Fiat currency * Financial capital * Float (money supply), Float * Fractional-reserve banking * FRED (Federal Reserve Economic Data) * Full reserve banking * Great Contraction * Index of Leading Indicators – money supply is a component * Inflation * Monetarism * Monetary base * Monetary economics * Monetary reform * Money circulation * Money creation * Money market * Money demand * Liquidity preference * Seigniorage * Stagflation

# References

Article in the New Palgrave on Money Supply
by Milton Friedman
Do all banks hold reserves, and, if so, where do they hold them? (11/2001)

* [http://research.stlouisfed.org/aggreg/ St. Louis Fed: Monetary Aggregates] *
Discontinuance of M3 Publication

Investopedia: Money Zero Maturity (MZM)

* [https://fraser.stlouisfed.org/title/88 Historical H.3 releases]
Money Stock Measures (H.6)

U.S. MZM magnitude
an
velocity
used as a predictor of inflation
Data on Monetary Aggregates in Australia

Monetary Survey
from People's Bank of China {{Authority control Monetary policy Inflation