MoneyMoney

Some Basic Some Basic DefinitionsDefinitions

The ComponentsThe ComponentsM = C + DM = C + D

M = the Money M = the Money Stock; Stock; assets assets held by the general publicheld by the general public

C = Currency in the holdings C = Currency in the holdings ofof thethe non-banking non-banking public; a public; a central bank liabilitycentral bank liability

D = Deposits; readily usable D = Deposits; readily usable for expenditure; a for expenditure; a commercial bank liabilitycommercial bank liability

Simple AccountsSimple AccountsCOMMERCIAL BANKSCOMMERCIAL BANKSAssetsAssets LiabilitiesLiabilitiesLoans (= Lent)Loans (= Lent) D D RRSecuritiesSecuritiesGENERAL PUBLICGENERAL PUBLICAssetsAssets LiabilitiesLiabilitiesM = C + DM = C + D Debt (= Debt (=

Borrowed)Borrowed)SecuritiesSecurities

Semi-Constant RatiosSemi-Constant RatiosReserve/Deposit = R/DReserve/Deposit = R/DR/D is determined R/D is determined

interactively by central interactively by central bank & commercial banksbank & commercial banks

Currency/Deposit = C/DCurrency/Deposit = C/DC/D is determined by the C/D is determined by the

general publicgeneral public

The Monetary BaseThe Monetary Base

The monetary base is often The monetary base is often called “high-powered money” called “high-powered money” and is given the symbol H.and is given the symbol H.

H = C + RH = C + RH is a liability of the central H is a liability of the central

bank and is therefore (almost) bank and is therefore (almost) controllable by that bankcontrollable by that bank

Determining the Money Determining the Money Supply and its Growth RateSupply and its Growth Rate

Changes in the money supply are Changes in the money supply are determined by H, C/D, and R/Ddetermined by H, C/D, and R/D

Starts with Starts with ΔΔH from CentBankH from CentBankMediated through interaction of Mediated through interaction of

CentBank/CommBanks (R/D)CentBank/CommBanks (R/D)Completed through interaction of Completed through interaction of

Public & Commercial Banks (C/D)Public & Commercial Banks (C/D)

Equations ApproachEquations Approach

M = C + DM = C + DH = C + RH = C + RTherefore M/H = (C + D)/(C + Therefore M/H = (C + D)/(C +

R), andR), andM/H = (C/D + D/D)/(C/D + M/H = (C/D + D/D)/(C/D +

R/D)R/D)= (C/D + 1)/(C/D + R/D) = (C/D + 1)/(C/D + R/D)

Three EquationsThree Equations

M = H*(C/D + 1)/(C/D + M = H*(C/D + 1)/(C/D + R/D)R/D)

C = H*(C/D)/(C/D + R/D)C = H*(C/D)/(C/D + R/D) D = H/(C/D + R/D)D = H/(C/D + R/D)

A Simple ExampleA Simple Example

Suppose: R/D = 0.2 & C/D Suppose: R/D = 0.2 & C/D = 0.3 (Not unrealistic), = 0.3 (Not unrealistic), therefore, therefore,

M = 2.6H M = 2.6H C = 0.6H C = 0.6H D = 2HD = 2H

Closing Notes for Closing Notes for DiscussionDiscussion

A larger C/D and/or a larger A larger C/D and/or a larger R/D means a smaller money R/D means a smaller money supply or slower growth ratesupply or slower growth rate

Japan’s C/D is much larger Japan’s C/D is much larger than that of USAthan that of USA

Europe’s is between the twoEurope’s is between the twoWhere is Vietnam’s? Where is Vietnam’s?