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In economics, the monetary base (also base money, money base, high-powered money, reserve money, or, in the UK, narrow money) is a term relating to the money supply, the amount of money in the economy. It is highly liquid money and includes currency and vault cash. The monetary base is comprised of coins, paper money, and commercial banks' reserves with the central bank. In the United States, with the beginning of the Federal Reserve System in 1913, monetary base also includes deposit liabilities of the Federal Reserve System to banks. [1] Broader measures of the money supply include the public's bank deposits (checking, saving, etc.). These measures of money are typically classified as levels of M, where the monetary base is smallest and lowest M-level: M0. Base money can be described as the most acceptable (or liquid) form of final payment. The narrow money supply is an earlier term used to describe currency held by the non-bank public and demand deposits of banks M1 in the U.S. (M1). In the U.K., 'narrow money' refers to bank reserves plus currency (MO).

Contents

Management

"Open market operations" are monetary policy tools that affect directly the monetary base; the monetary base can be expanded or contracted using an expansionary policy or a contractionary policy, but not without risk.

The monetary base is typically controlled by the institution in a country that controls monetary policy. This is usually either the finance ministry or the central bank. These institutions print currency and release it into the economy, or withdraw it from the economy, through open market transactions (i.e., the buying and selling of government bonds). These institutions also typically have the ability to influence banking activities by manipulating interest rates and changing bank reserve requirements (how much money banks must keep on hand instead of loaning out to borrowers).

The monetary base is called high-powered because the magnitude of changes in monetary base can be greatly magnified by the money multiplier. That is, a small change in the monetary base can result in a large change in the overall money supply. As an example, a $1 billion increase in monetary base will lead to an increase of many more billions in the money supply because of money multiplier effects of the fractional reserve ratio.

References

  1. ^ See "A Monetary History of the United States, 1867-1960" by Milton Friedman and Anna Jacobson Schwartz, p. 50.

External links

See also

References

  • Karl Brunner (1987). "high-powered money and the monetary base," The New Palgrave: A Dictionary of Economics, v. 2, pp. 654-55. Reprinted in Eatwell et al. Money: New Palgrave, pp. 75-78.
  • Phillip Cagan (1965). Determinants and Effects of Changes in the Stock of Money, 1875-1960. NBER. Chapter 3 (link), "High-Powered Money," pp. 45-117.
  • Charles Goodhart (1987). "monetary base," The New Palgrave: A Dictionary of Economics, v. 2, pp. 654-55.

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