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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 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.
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 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.
Accountingedit
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, 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 linksedit
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. ISBN0-935859-10-1. 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. ISBN0-935859-10-1. 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. ISBN0-87014-097-3. Retrieved 8 February 2011.
Aggregate Reserves Of Depository Institutions And The Monetary Base (H.3)
February 15, 2024
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You can help expand this article with text translated from the corresponding article in German January 2024 Click show for important translation instructions Machine translation like DeepL or Google Translate is a useful starting point for translations but translators must revise errors as necessary and confirm that the translation is accurate rather than simply copy pasting machine translated text into the English Wikipedia Consider adding a topic to this template there are already 8 991 articles in the main category and specifying topic will aid in categorization Do not translate text that appears unreliable or low quality If possible verify the text with references provided in the foreign language article You must provide copyright attribution in the edit summary accompanying your translation by providing an interlanguage link to the source of your translation A model attribution edit summary is Content in this edit is translated from the existing German Wikipedia article at de Monetare Basis see its history for attribution You should also add the template Translated de Monetare Basis to the talk page For more guidance see Wikipedia Translation 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 Euro monetary base 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 Contents 1 Management 2 Monetary policy 3 Accounting 4 See also 5 References 6 External linksManagement edit nbsp U S Monetary base nbsp Base money of the Euro zone and money supplies M1 M2 and M3 and euro zone GDP from 1980 2021 Logarithmic scale 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 editThis section possibly contains original research Please improve it by verifying the claims made and adding inline citations Statements consisting only of original research should be removed February 2022 Learn how and when to remove this template message 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 editFollowing 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 editMoney creation Monetary reform Fractional reserve banking Credit theory of money Broad moneyReferences 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 a href Template Cite journal html title Template Cite journal cite journal a 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 a href Template Cite journal html title Template Cite journal cite journal a Cite journal requires journal help External links editBrunner 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 Retrieved from https en wikipedia org w index php title Monetary base amp oldid 1195130940, wikipedia, wiki, book, books, library,
