Monetary Base

Monetary Base
Monetary Base
 the total amount of a currency that is either

circulated in the hands of the public or in the
commercial bank deposits held in the central bank's
reserves. This measure of the money supply typically
only includes the most liquid currencies; it is also
known as the "money base."
Example
Country Z has 600 million currency units

circulating in the public and its central bank has 10
billion currency units in reserve as part of deposits
from many commercial banks. In this case, the
monetary base for country Z is 10.6 billion currency
units. For many countries, the government can
maintain a measure of control over the monetary base
by buying and selling government bonds in the open
market.
The monetary base is a component of a nation’s
money supply. It refers strictly to highly liquid funds
including notes, coinage and current bank deposits.
When the Federal Reserve creates new funds to
purchase bonds from commercial banks, the banks
see an increase in their holdings, which causes the
monetary base to expand.
Monetary Base and the Money Supply
 The money supply expands beyond the monetary base to

include other assets that may be less liquid in form. It is
most commonly divided into levels, listed as M0 through
M3 or M4 depending on the system, with each
representing a different facet of a nation’s assets. The
monetary base’s funds are generally held within the
lower levels of the money supply, such as M1 or M2,
which encompasses cash in circulation and specific liquid
assets including, but not limited to, savings and checking
accounts.
 To qualify as part of the money base, the funds must

be considered a final settlement of a transaction. For
example, if a person uses cash to pay a debt, that
transaction is final. Additionally, writing a check
against money in a checking account, or using a debit
card, can also be considered final since the
transaction is backed by actual cash deposits once
they have cleared.
 In contrast, the use of credit to pay a debt does not

qualify as part of the monetary base, as this is not the
final step to the transaction. This is due to the fact
the use of credit just transfers a debt owed from one
party, the person or business receiving the credit-
based payment, and the credit issuer.
Smaller Scale Monetary Bases and Money
Supplies
 At the household level, the monetary base consists of

all notes and coins in the possession of the
household, as well as any funds in deposit accounts.
The money supply of a household may be extended
to include any available credit open on credit cards,
unused portions of lines of credit and other
accessible funds that translate into a debt that must
be repaid.
Money Creation
 To understand the process of money creation today,

let us create a hypothetical system of banks. We will
focus on three banks in this system: Acme Bank,
Bellville Bank, and Clarkston Bank. Assume that all
banks are required to hold reserves equal to 10% of
their checkable deposits. The quantity of reserves
banks are required to hold is called required
reserves.
 The reserve requirement is expressed as a required
reserve ratio; it specifies the ratio of reserves to
checkable deposits a bank must maintain. Banks
may hold reserves in excess of the required level;
such reserves are called excess reserves. Excess
reserves plus required reserves equal total reserves.
Money Process Creation
 BSP is the central depository for the reserves of the

banking system and the major sources of new
reserves
 BSP is responsible for the retirement or disposition
of domestic currency
 BSP is in a unique position to control the supply of
money essential in the promotion of economic
growth and stability
Money Supply Process
The supply of money is defined as the currency

in circulation or the currency held by the non-bank
public (C) plus deposit liabilities of commercial banks
(D) which include demand deposits (dd), savings
deposits (sd), time deposits (td) and deposit
substitutes (ds), thus, domestic liquidity is
M3 = C + D,
 where D = dd + sd + td + ds

Monetary Base

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Monetary Base

 the total amount of a currency that is either

Country Z has 600 million currency units

 The money supply expands beyond the monetary base to

 To qualify as part of the money base, the funds must

 In contrast, the use of credit to pay a debt does not

 At the household level, the monetary base consists of

 To understand the process of money creation today,

 BSP is the central depository for the reserves of the

The supply of money is defined as the currency

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