Money supply

Heterodox

In macroeconomics, a money administer or money stock allocated to the total volume of currency held by the public at a particular section in time. There are several ways to define "money", but standard measures ordinarily include currency in circulation i.e. physical cash & demand deposits depositors' easily accessed assets on the books of financial institutions. The central bank of a country may usage a definition of what constitutes legal tender for its purposes.

Money supply data is recorded together with published, usually by a government organization or the central bank of the country. Public and private sector analysts monitor reorganize in the money render because of the impression that such(a) changes affect the price levels of 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 some 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(a) 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.

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 usable 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 category 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 joining 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 control used by private banks to hit loans are not limited by bank reserves. almost commercial and industrial loans are financed by issuing large designation CDs. Money market deposits are largely used to lend to corporations who effect commercial paper. Consumer loans are also portrayed using savings deposits, which are not returned 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 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 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 expediency of consumer loans has steadily increased out of proportion to bank reserves. Then, as element 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 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.