Money turnover. Composition and structure of the money supply
Money supply is the most important indicator of the amount of money in circulation. The money supply includes the total amount of money, cash and non-cash, which is currently in circulation, owned by various economic entities. In addition to money, it may include other highly liquid financial assets that can be converted into money with minimal loss of time and money. These include, for example, certificates of deposit from large commercial banks, short-term Treasury bills, and Treasury savings bonds. Thus, the money supply is a structurally heterogeneous indicator. To characterize the structure of the money supply, monetary aggregates are used - MO, Ml, M2.
The differentiation of monetary aggregates is made based on the degree of their liquidity, i.e. the possibility of quickly, with the least risks and costs, converting various forms of deposits and savings into quickly realizable funds. Monetary aggregates are ranked according to the degree of decrease in liquidity. Thus, monetary aggregates MO and M1 characterize the most liquid component of the money supply. They include components that fall within the definition of money supply in the narrow sense of the word.
Other money supply aggregates include funds that are used in transactions subject to certain restrictions. At their core, they are substitutes, or “quasi-money.”
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Money supply, its structure. Monetary aggregates. Pure money, quasi-money and broad money.
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Issue of money, types and reasons. Seigniorage.
The amount of money circulating in the economy is called the money supply and represents the value of money supply. The quantity of money supply is measured using monetary aggregates. Monetary aggregate is a grouping of bank accounts according to the rate at which funds in these accounts are converted into cash. Each following unit:
ü Includes the previous one;
ü Is less liquid than the previous one;
ü Is more profitable than the previous one.
Monetary aggregates:
ü Aggregate M0 reflects cash in circulation.
ü Aggregate M1 = M0 + money stored in demand accounts (money that is attracted by banks in the form of deposits in the current period, but can be returned to the depositor at any time without the risk of loss of interest).
ü Aggregate M2 = M1 + money in time accounts of commercial banks. Time accounts are characterized by the fact that the depositor and the bank make an agreement under which the entity can withdraw the invested money along with interest at a strictly defined time, otherwise part of the interest is lost as compensation to the bank due to failure to fulfill the agreement.
ü Unit M3 = M2 + short-term securities, bank certificates, etc.
ü Unit L = M3 + government securities.
The monetary aggregate “quasi-money” is liquid deposits of the banking system that are not directly used as a means of payment: time and savings deposits and deposits in foreign currency. In addition to these aggregates, there is quasi-money, which is the most growing part of the money supply. This is money in term savings accounts, i.e. difference between aggregates M2 and M1. We get, M2=M1+QM.
The monetary aggregate “broad money” is a combination of aggregates M2 and “quasi-money”.
Money emission is the release of additional money into circulation. The release of banknotes into circulation in all forms leads to an increase in the money supply in circulation. Main forms of emission:
1) issue of credit money - banknotes;
2) deposit - check issue;
3) issue of securities.
The main passive operation of the central bank and one of the forms of emission is the issue of banknotes, the acceptance of deposits of commercial banks and the treasury, and operations for the formation of equity capital.
1. Fiduciary issue - issue of banknotes, banknotes, unsecured by the reserve of precious metals (primarily gold) of the issuing bank. Historically, the issue of banknotes was allowed only if there was a gold reserve, however, this rule was gradually abandoned. Nowadays fiduciary emission is dominant.
The main source of central bank resources in most countries is the issue of banknotes. At the present stage, the issue of banknotes is not backed by gold. Gold backing of banknotes has been abolished, although in some countries it formally continues to operate.
Central bank loans can be credited to commercial bank and treasury accounts maintained at the central bank. In this case, it is not the banknote issue, but the deposit issue of the central bank.
The source of resources for central banks are deposits from the treasury and commercial banks. Commercial banks can deposit part of their cash reserves, including mandatory ones, into interest-free accounts with central banks. In a number of countries, required reserves are credited to special accounts, usually interest-free. This procedure applies, in particular, in Russia. Central banks can also open time accounts with fixed interest rates for commercial banks. Typically, the bank's equity capital accounts for no more than 4% of liabilities.
2. Another form of issue is deposit-check issue. Produced by commercial banks and serves as the basis for non-cash payments. In terms of volume, deposit-check emission significantly exceeds the emission of cash.
3. Also one of the forms of issue is the issue of securities.
The procedure for issuing equity securities, unless otherwise provided by the legislation of the Russian Federation, includes the following stages:
— adoption by the issuer of a decision on the issue of issue-grade securities;
— registration of the issue of issue-grade securities;
— for the documentary form of issue – production of securities certificates;
— placement of issue-grade securities;
— registration of a report on the results of the issue of securities.
An increase in the supply of money serves as a factor in stimulating aggregate demand and an important tool for stabilization (countercyclical) policy. The amount of money in the country is under the control of the state; in practice, this mission is entrusted to the central bank. Seigniorage is the income received by the government as a result of its monopoly right to print money.
6 Indicators (monetary aggregates and monetary base) characterizing the volume and structure of the money supply.
Money supply is the most important indicator of the amount of money in circulation. The money supply includes the total amount of money, cash and non-cash, which is currently in circulation, owned by various economic entities.
Concept and structure of money supply
In addition to money, it may include other highly liquid financial assets that can be converted into money with minimal loss of time and money. These include, for example, certificates of deposit from large commercial banks, short-term Treasury bills, and Treasury savings bonds. Thus, the money supply is a structurally heterogeneous indicator. To characterize the structure of the money supply, monetary aggregates are used - MO, Ml, M2.
The monetary aggregate is a statistical indicator characterizing the volume and structure of the money supply.
With all the variety of methods for statistical accounting of the money supply in different countries, monetary aggregates in the most general form can be presented as follows:
MO includes cash in circulation (banknotes, metal coins, and in some countries treasury notes), including cash in bank cash desks;
M1 contains the MO aggregate plus funds in current bank accounts and demand deposits that can be immediately used either in the function of money as a medium of exchange or as a means of payment;
M2 consists of the aggregate M1 plus time and savings deposits in commercial banks: funds from these deposits become available to the depositor only after a certain time stipulated by the deposit agreement between the bank and its client;
MZ contains the M2 unit plus savings certificates in specialized financial and banking institutions;
M4 consists of the MZ aggregate plus shares, bonds, certificates of deposit of commercial banks, bills of individuals and legal entities, i.e. monetary obligations, the transformation of which into “real” money takes a lot of time.
The differentiation of monetary aggregates is made based on the degree of their liquidity, i.e. the possibility of quickly, with the least risks and costs, converting various forms of deposits and savings into quickly realizable funds. Monetary aggregates are ranked according to the degree of decrease in liquidity. Thus, monetary aggregates MO and M1 characterize the most liquid component of the money supply. They include components that fall within the definition of money supply in the narrow sense of the word. Other money supply aggregates include funds that are used in transactions subject to certain restrictions. At their core, they are substitutes, or “quasi-money.”
The qualitative composition of monetary aggregates is ambiguous in different countries, which is due to both traditionally established theoretical ideas about money, the ratio of cash and non-cash components in the total monetary turnover, money and financial assets, and the specifics of the monetary system and the methods used for its regulation by the central bank.
The money supply in the Russian Federation is calculated as of the 1st day of each month based on data from the consolidated balance sheet of the banking system. The money supply includes the following monetary aggregates:
MO - cash in circulation;
M1 consists of the MO aggregate plus funds in settlement, current and special accounts of enterprises and organizations, in the accounts of local budgets, budgetary, trade union, public and other organizations, plus State Insurance funds, plus deposits of the population and enterprises in banks, plus demand deposits of the population in Sberbank;
M2 consists of the M1 aggregate plus time deposits of the population in Sberbank;
MH consists of the M2 unit plus certificates and government bonds.
This definition of the structure of the money supply increases the activity of money circulation management, since it allows us to more fully take into account the degree of pressure of funds in each aggregate on the formation of effective demand, and, consequently, prices in the market of goods and services. In the Russian Federation, the M2 aggregate is used as the main monetary aggregate used in calculating current macroeconomic indicators.
The monetary base is the totality of those obligations of the central bank towards the private sector that it has the ability to control. The components of the monetary base are banknotes and coins held by the population and in the cash registers of banks, and funds of commercial banks deposited with the central bank in the form of required reserves.
In the Russian Federation, “narrow” and “broad” monetary bases are calculated. The narrow monetary base includes the MO aggregate (cash in circulation), plus cash in bank cash desks and required reserves of banks in the Central Bank of the Russian Federation (hereinafter referred to as the Bank of Russia). The broad monetary base includes cash in circulation, taking into account balances at the cash desks of credit institutions, funds in correspondent and deposit accounts of credit institutions with the Bank of Russia, and required reserves.
The sources of growth in the monetary base can be either an increase in the net international reserves of the Bank of Russia and the Government of the Russian Federation, or the volume of their net domestic assets.
In any country, the money supply is the object of constant government regulation. The need for such regulation is determined by the fact that the size of the money supply and the rate of its growth affect the state of other economic indicators. If the money supply grows significantly faster than national output, then, other things being equal, this can lead to inflation. If the growth of the money supply does not keep pace with the growth of national production, then the money in circulation at a constant speed of circulation may not be enough to normally service all payments and settlements, and then a payment crisis arises.
In the process of regulating the volume of money supply, the purchasing power of money is determined, on which the quality of money’s performance as a measure of the value of a means of accumulation depends. The depreciation of money (decrease in its purchasing power) leads to the fact that a stable foreign monetary unit is used as a measure of value in the national economy, ensuring comparability of prices over time. Prices for all goods are set not in national monetary units, but in foreign ones, for example in dollars. As a store of value, depreciating national money is also being replaced by foreign currency. The population, followed by enterprises and organizations, prefer to keep their savings in foreign currency, most often in dollars. The process of “dollarization” of the economy is taking place.
The fulfillment by money of the functions of a medium of circulation and a means of payment also depends on its stability: at high rates of inflation, even the fleeting presence of heavily depreciating money in their hands entails significant losses for their holders. Therefore, in conditions of hyperinflation, money in the functions of a medium of circulation and a means of payment is also replaced by foreign currency.
To analyze the state of money circulation, in addition to the money supply indicator, such indicators as the velocity of money circulation, the monetization coefficient and the cash ratio are also used.
The velocity of money circulation characterizes the intensity of the movement of money as a medium of circulation and as a means of payment, i.e., it reflects the number of transactions that each monetary unit serves during the year. In developed countries, two methods are usually used to calculate the velocity of money:
the speed of circulation of money in the circulation of income as the ratio of gross national product (GNP) or national income to the money supply (M1 or M2);
turnover of money in payment circulation as the ratio of the amount of funds turnover in bank current accounts to the average annual value of the money supply. The higher the velocity of circulation of money, the less, other things being equal, the amount of money needed for circulation.
The monetization coefficient is the reciprocal of the velocity of money. This indicator is defined as the ratio of the money supply (Ml or M2) to GNP and reflects the saturation of the economy with money.
The cash ratio characterizes the share of cash in the total money supply. It is calculated as the ratio of the cash money supply (MS) to the monetary aggregates Ml, M2 or MZ. Taking into account that the general trend is to increase the share of non-cash money in the total money turnover, we can assume that the lower the value of the cash ratio, the more developed the money circulation.
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The money supply is the total amount of money that is currently in circulation and owned by different economic entities.
A monetary aggregate is a part of the money supply, represented by a certain set of monetary assets grouped in descending order of liquidity, with each subsequent aggregate including the previous one.
The national definition of the money supply is through the M2 aggregate, which means the total amount of money in the currency of the Russian Federation, intended for payment for goods and services, as well as for the purpose of accumulation by financial (except credit) and non-financial organizations and individuals - the President of the Russian Federation.
M2 is the sum of money in circulation and non-cash funds.
M0 is cash in circulation, namely, the most liquid part of the money supply available for immediate use as a means of payment. This unit includes banknotes and coins in circulation.
The M2 indicator in the national definition does not include deposits in foreign currency.
The monetary base is not a monetary aggregate, but represents the basis for the formation of the aggregate.
2.1. Money supply and its elements
The monetary base is money of increased efficiency.
As part of the broad definition of the monetary base, all funds are counted only in national currency.
Structure of the monetary base:
1.cash in circulation, taking into account balances at the cash desks of credit institutions;
2.required reserves;
3. obligations of the Bank of Russia to repurchase securities;
4. reserve funds for foreign exchange transactions deposited in the Bank of Russia.
Features of the money supply in Russia:
Basis M2, high share of cash; used as aggregates of bank accounts in accordance with the Civil Code of the Russian Federation; low share of time deposits in the monetary aggregates; indirect accounting of foreign currency in the structure of the money supply to analyze the level of dollarization of the economy and take into account inflation expectations;
In Russia there is M2X (broad money indicator) it reflects the level of dollarization of the Russian economy.
M2X = M2 + funds in foreign currency in bank accounts + foreign currency in the hands of the population (approximately).
Structure, functions and tasks of the Ministry of Finance of the Russian Federation and the federal financial services subordinate to it.
The Ministry of Finance is a federal executive body responsible for developing a unified state finance, credit, monetary policy and legal regulation in the financial sector, as well as developing financial policy in the field of civil service and the judicial system.
The task is to develop a unified state financial, credit, monetary policy, as well as policies in the field of auditing, accounting and financial reporting, mining, production, processing of precious metals and precious stones, customs duties, including determination of the customs value of goods, etc.
Structure: Federal Tax Service, Federal Insurance Supervision Service, Federal Service for Financial and Budgetary Supervision and Federal Treasury. Since 2007, the Federal Service for Financial Monitoring has been administered by the Government of the Russian Federation.
functions The Ministry of Finance can be called:
— development of draft laws on all tasks to be solved — coordination of budgetary and monetary policies — management of the government debt of the Russian Federation — maintaining a book of accounting of government debts and registration of issues of government securities
1-A, 2-B, 3-B, 4-B, 5-AG, 6-B, 7-B, 8-B, 9-B, 10-B
Date of publication: 2015-01-26; Read: 312 | Page copyright infringement
The essence and functions of money. Money supply structure
Macroeconomic equilibrium presupposes the presence of certain proportions in the money market. In Keynesian theory, the level of national production and employment is related to changes in aggregate spending and the implementation of fiscal policy; the money market plays a minor role. However, in the post-war period, in the 50-60s of the twentieth century, when inflation became more common than depression, and many states were able to achieve stabilization and contain inflation by applying monetary restriction policies, there was a revival of interest in the role of money in the economy. system. One of the most influential modern neoclassical trends, monetarism (founder - American economist Milton Friedman, Nobel Prize laureate in 1976), has become widespread and recognized in economic science. The monetarist concept is based on the principle of government non-interference in the functioning of a market economy, recognizes fiscal policy as ineffective, and explains the problems of economic instability and inflation as “purely monetary factors.”
From a monetarist point of view, if the supply of money is insufficient, then, at least temporarily, real output and employment will decline. On the other hand, flooding the economic system with too much money causes inflation. Therefore, one of the most important tasks of national economic policy is to create conditions that ensure the stability of the monetary system, which is the basis for the stability of the national market, the level of production and employment. Thus, in modern theories, money is considered as an active factor of social production, and the money market as a necessary part of macroeconomic analysis.
Essence money can be determined through them functions. Money is a means of paying for goods and services, i.e. medium of exchange, means of measuring value, means of storage.
Money like medium of exchange, allow you to get away from barter trade and, thus, lead to a reduction in distribution costs, which contributes to the growth of the national economy.
Money like measure of value is a monetary unit used to measure and compare the costs of goods and services. Money, as a measure of value, must have homogeneity, which is necessary for measuring the value of various transactions.
Money like store of value(wealth accumulation) is an asset that is retained after the sale of goods and services and provides future purchasing power. Any asset can serve as a store of value to some extent (jewelry, art, houses, stocks, bonds, etc.) However, money is more suitable for this function because it has the inherent property liquidity. Liquid is an asset that can be used as a means of payment (or easily converted into a means of payment) and has a fixed nominal value. Money by definition has absolute liquidity. All other assets have liquidity to a greater or lesser extent.
For analytical purposes and the development of specific policies, it is not enough to know what money represents. It is necessary to determine their quantity. Measuring the quantity of money poses some difficulties, since different types of assets perform all the functions of money to varying degrees. Depending on the degree of liquidity, a whole set of money supply indicators is used. The construction principle is based on the fact that all assets can be ranked from absolutely liquid to absolutely illiquid. The structure of the money supply consists of the following monetary aggregates.
Money supply M1– “money”, consists of the most liquid assets and includes two elements: 1) cash, i.e. metal and paper money in circulation; 2) check deposits, i.e. demand deposits in commercial banks, various savings institutions, on which checks can be written. Cash is a small part of the money supply M1(about 3% is metal money and about 25% is paper money). The most widespread are checkable deposits as part of the money supply. Checks are a means of transferring ownership of deposits in financial institutions to other entities and are accepted as payment for goods and services, and checkable deposits can be immediately converted into paper and metal money, so checks are widely used as a medium of exchange.
Money supply M2 And M3– “almost money” are certain highly liquid financial assets that include an aggregate M1 plus such items as checkless savings accounts, time deposits, short-term government securities, which, although they do not function as a medium of exchange, can be easily and without risk of financial loss converted into cash or checking accounts. money supply aggregate L includes all of the above elements plus long-term government securities. The term "almost money" means that these elements cannot be directly used to pay for goods and services, but must first be converted into M1.
In the future, when analyzing the money market, we will adhere to a narrow definition of money M1, since its components can be consumed immediately.
2. Supply of money and demand for money.
Equilibrium in the money market
Sm money offer equal to a certain constant quantity, which is determined by monetary and financial institutions that supply the economy with the volume of money supply necessary to maintain a certain level of national production. The money supply does not depend on the interest rate, so it looks graphically like a vertical line Sm(Fig. 14.1, a). The supply of money will be discussed in more detail in the chapter “Monetary Policy.”
Rice. 14.1. Supply of money (a), demand for money (b),
supply and demand for money, equilibrium in the money market (c)
The demand for money consists of the demand for money for transactions and the demand for money from assets (or speculative demand for money). Demand for money for transactions Dt is directly proportional to the volume of economic transactions, i.e. determined by the size of the nominal gross national product and the velocity of money circulation Dt = GNP/V.
Graphically, the demand for money for transactions looks like a straight vertical line Dt, i.e. does not depend on the interest rate (Fig. 14.1,b). For example, GNP is 500 monetary units, the velocity of money circulation is 5, then Dt= 100 monetary units
Demand for money from assets Da- this is the demand for M1 money (liquid assets) as savings. Assets are savings, accumulations of economic entities. There are tangible assets - real estate, jewelry, antiques, and financial assets - money M1, time deposits, securities (corporate shares, private and government bonds). The advantage of owning money compared to other financial assets, such as bonds, is their absolute liquidity, i.e. the ability to be transformed into goods and services. The disadvantage of owning money as an asset compared to bonds is that it does not earn interest.
The interest rate represents the opportunity cost of holding money as an asset.
The higher the costs (i.e. the interest rate), the less money people want to hold as assets. They reallocate financial assets in favor of securities, such as interest-bearing bonds. At a low interest rate, opportunity costs are insignificant, so the preference for liquidity increases, and the population increases the demand for money as financial assets. Therefore, the demand for money as assets Da is inversely related to the interest rate (Fig. 14.1, c).
General demand for money is the sum of the demand for money for transactions and the demand for money from assets, Dm = Dt + Yes. Graphically, the total demand for money Dm looks like a horizontal shift in the demand graph for money as assets Da on the amount of money demanded for transactions Dt(Fig. 14.1, c).
Intersection of demand lines Dm and suggestions Sm money determines equilibrium price, i.e. interest rate And equilibrium quantity in the money market Dm = Sm(Fig. 14.1, c).
MONEY SUPPLY. MONEY SUPPLY INDICATORS
A deviation of the interest rate from the equilibrium will lead to a temporary imbalance, inequality in the magnitude of the demand for money and the money supply. But under the influence of the market mechanism, equilibrium will be restored fairly quickly.
Changing Equilibrium in the money market can occur if the demand for money changes Dm or money offer Sm. As a result the equilibrium interest rate changes.
Of particular importance is change in money supply Sm, since financial and credit institutions play an active role in this process. The money supply Sm changes when financial institutions, pursuing a policy of cheap or expensive money, expand or contract the money supply.
Increase in money supply Sm1 creates a temporary surplus at a given interest rate (Fig. 14.2), as a result of which the demand for other financial assets (bonds) increases, and their price becomes higher. If the market price rises, then the interest rate on bonds decreases. This is because the yield on bonds is defined as a fixed percentage of the face value of the bonds. Therefore, a change in the exchange rate price leads to a change in the real rate of interest received on bonds.
If the interest rate on bonds decreases and all borrowers compete to offer lenders an interest rate close to what the bonds earn, then there will be a general decrease in interest rates. When interest rates are low, the opportunity cost of liquidity preference is low, so consumers prefer to hold financial assets in the form of cash or current deposits. Thus, with an increased supply of money, equilibrium is restored at a lower interest rate.
The opposite development of events will occur when the money supply decreases ( Sm2). In this case, equilibrium will be established at a higher percentage level (Fig. 14.2). Consider how this happens yourself, based on the graph.
The article presents the dynamics and structure of the money supply from 1993 to 2015. Indicators of money circulation in the Russian Federation from 2005 to 2015 are also presented. and an analysis of the relationship between the velocity of money supply and various economic indicators was carried out.
The money supply is one of the main elements of any monetary system, so we considered it relevant to conduct a statistical analysis of money circulation in the Russian Federation.
Let us consider aggregate indicators of the structure of the money supply in the Russian Federation for 1993 - 2015, which are the main macroeconomic indicators, using the data in Table 1 as an example.
Table 1. Money supply and structure of the money supply in the Russian Federation for the period from 1993 to 2015.
|
Money supply M0 |
Money supply M1 |
Money supply M2 |
Money supply in national definition |
|
In recent years, the characteristics of the money supply have undergone significant changes. As can be seen from Table 1, the monetary aggregate M0, which represents cash in circulation, increased rapidly from 1993 to 2015, which meant an increase in the volume of money issued by the Central Bank of the Russian Federation. However, in the period from 2008 to 2009 and from 2014 to 2015, there was a slight decline in this indicator by 5.1% and 1.9%, respectively.
Indicator M1 (aggregate M0 + funds of enterprises in banks, etc.) and M2 (aggregate M1 + household deposits in banks) tended to increase during the years under review, but from 2010 to 2011 they decreased by 16.8 % and by 42.2%.
As for the money supply in the national definition, it, equivalent to M1 and M2, decreased by 31.3% in the period from 2010 to 2011, then the situation stabilized.
The sharp rise and fall of all indicators is associated not only with a decrease in the volume of cash in circulation, but also with a reduction in the volume of deposits of the population, enterprises and organizations in bank accounts.
Money supply and its main aggregates
It is worth noting that among non-cash and cash money, non-cash money prevails.
When considering the dynamics of money circulation, it would be advisable to analyze the relationship between the velocity of circulation of the money supply and various economic indicators.
Table 2. Indicators of money circulation in the Russian Federation from 2005 to 2015.
From Table 2 it can be seen that during the period under review, the characteristic of the velocity of circulation of the money supply tended to a significant decline. Between 2005 and 2010. and from 2011 to 2015. it decreased by 63.5% and 69.6%, respectively. As for the growth rate of the velocity of money circulation, from 2005 to 2009. the indicators were discontinuous, but since 2010 there has been a significant drop of 62.6%. Consequently, the dynamics of these indicators indicates a decrease in the turnover of monetary aggregates, i.e., a decrease in their liquidity.
A slight decrease in cash in circulation in the structure of the money supply indicates a slight decrease in inflationary pressure from aggregate demand. We can also conclude that non-cash funds will exceed cash by 10-15%. Such an irrational relationship between these two areas negatively affects money circulation as a whole, because most of the cash does not participate in banking circulation, unlike non-cash funds. This phenomenon undermines the stability of the banking system, consequently, there is a reduction in cash in the credit sector.
Money turnover - process of continuous movement of money in cash and non-cash forms. Thus, the structure of monetary circulation consists of:
1) cash turnover, and
2) non-cash money turnover.
Structure of money turnover as an element of the monetary system can be considered, first of all, as the ratio of cash circulation and non-cash circulation. The state determines the procedure for cash and non-cash money circulation. The material basis of money circulation is commodity circulation. The main channels for the movement of money are their movement between: banks, enterprises, organizations, financial institutions, etc.
For each of these flows, there can be a counter movement of money. The predominant place is occupied by cash flows, where one of the parties is enterprises and organizations. The process of money circulation combines the interaction of individual subjects of the economic system in the process of reproduction with its main phases: production, exchange, distribution and consumption.
Non-cash money turnover involves the movement of money by moving between accounts or offsetting counterclaims. Each transaction and payment requires a new entry in bank accounts. Cash turnover carried out using cash (real) money. The movement of cash occurs primarily in connection with servicing the consumer demand of the population. Cash remains in the sphere of circulation even after the sale of consumer goods has been completed, services provided to the population have been paid for, etc.
Depending on the characteristics of the payment, the movement of money that mediates commodity and non-commodity turnover is distinguished. Commodity turnover associated mainly with the process of production and sales of products, provision of services, and performance of work. Non-commodity - fulfilling financial obligations and making other non-commodity payments. The nature of the payment relationship that arises within the framework of commodity and non-commodity money turnover allows us to distinguish such main parts as:
1) cash flow, which services settlements for commodity transactions and individual non-commodity obligations of legal entities and individuals;
2) monetary circulation, servicing credit relations arising in all forms of credit (providing a loan, repayment, payment of interest, etc.);
3) monetary and financial turnover servicing financial relations, financial obligations, including those related to the implementation of budgets at various levels.
Depending on the entities between which the movement of money occurs, interbank money turnover(between banks); bank turnover, where one of the participants is a bank, and its partners are legal entities and individuals; interfarm turnover between legal entities; household turnover between individuals, etc.
The center of money circulation is banks; non-cash money circulation is carried out only through banks.
Cash begins its movement from the cash desks of banks, primarily from the Central Bank as an issuing center. From the working cash of this bank they go to commercial banks. Enterprises, organizations, entrepreneurs, using funds available in their accounts or granted loans, receive cash from the cash desks of commercial banks. These sums of money are intended to pay wages and equivalent payments and make other cash payments. Part of the cash from bank cash desks can be sold to other banks, as well as directly paid to the population (interest on deposits, payment of pensions, benefits, dividends, etc.).
From the cash desks of enterprises and organizations, payments are made to the population in cash received for the intended purpose in banks. Small amounts are used for cash payments between enterprises and organizations. Then it begins process of spending (using) cash by the population for the purchase of goods, payment for services, payments to the state and other legal entities and individuals. The expenditure of part of the cash can be deferred (savings of the population) in organized and unorganized forms. From the population, cash again goes to the cash desks of enterprises and organizations, but the latter cannot use it for cash payments without going through the bank, and must hand it over to the bank for crediting to their accounts. Thus, cash, having begun its movement from bank cash desks, passing through all channels of circulation, returns back to banks to begin a new turnover. This makes it possible to concentrate cash in banks, which leads to an acceleration of its circulation, a reduction in the costs of cash turnover, ensures its smooth transition to the non-cash money sphere, and vice versa, prevents counter transportation of money, and also creates the possibility of controlling the expenditure of cash.
Money supply - the totality of funds in circulation in cash and non-cash forms. The volume of money supply is influenced by the volume of GDP, the rate of economic growth, the degree of development of the banking system, financial markets, the structure of money turnover, the speed of money turnover, the economic policy of the state, monetary policy, etc. The money supply is characterized by monetary aggregates - indicators of the volume and structure of the money supply, its qualitative characteristics. The construction of indicators (aggregates) is based on liquidity, which is understood as the degree of costs and the rate of transformation (conversion) of individual components of the money supply into money as a means of circulation and payment.
In the Republic of Belarus, monetary aggregates are built taking into account international standards and national characteristics. These include:
M0 - (cash in circulation), includes banknotes and coins in circulation in the hands of individuals and in the cash desks of non-bank financial institutions and business entities;
M1 - (money supply in the narrow sense), includes M0 and transferable deposits, which are the balances of non-bank financial institutions, commercial and non-profit organizations, individual entrepreneurs and individuals on current, deposit and other demand accounts;
M2 - (ruble money supply), includes M1, and other deposits (time deposits) opened with credit institutions in Belarusian rubles, non-bank financial, commercial and non-profit organizations, individual entrepreneurs and individual residents of the Republic of Belarus in Belarusian rubles,
M2* funds in securities (except shares).
M3 - (broad money supply), includes M2 and transferable and time deposits in foreign currency, as well as securities (except shares) in foreign currency of non-bank financial institutions, commercial and non-profit organizations, individual entrepreneurs and individuals.
Based on monetary aggregates, one can determine economy monetization coefficient- level of provision of the economy with cash. It is calculated as the ratio of money supply to gross domestic product (M/GDP).
The total demand for money supply is determined from the Fisher formula:
M = (P * Q) / V, where P is the level (scale) of prices, Q is the volume of production, V is the speed of money circulation (depends on how many times one monetary unit circulates between banks and business entities).
The essence of money issue
Issuing money and issuing money are different concepts. The release of money into circulation and its withdrawal occur constantly: loans are provided and repaid, cash is issued, cash is collected (surrendered) to bank cash desks. At the same time, the amount of money in circulation may not increase.
Issue of money - This is the release of money into circulation, which leads to a general increase in the money supply in circulation. The main purpose of the issue is to satisfy the additional need of the economy for funds to expand production and form working capital. Due to the growth of production or due to rising prices for goods, an additional need not only for the economy, but also for the population for money constantly arises.
In a market economy, the following stages of money emission are noted:
1. Budget (treasury);
2. Credit (banking);
1. When budget issue The central bank (in the Republic of Belarus this is the National Bank) issues treasury notes (paper money) and government securities in order to finance government expenses that are not covered by budget revenues from other sources. Budget emission is not determined by the needs of the real economy, but by the budget deficit; then the additional money that appears leads to the depreciation of the entire money supply. If during the year GDP increases to the size of the budget issue, then inflation does not occur.
2. Credit issue . There are two types of credit issues - issues
1) non-cash and 2) cash.
1) non-cash money issue.In the process of production and sale of enterprises’ products on the market, there is an increase in their non-cash money in bank accounts. On the part of the banking system, this increase in funds in bank accounts occurs when banks carry out active operations. New money comes into circulation from banks as a result of their lending operations. This can occur during active operations of both central and commercial banks.
The creation of the money supply is carried out in the following sequence. At the first stage, the basis for non-cash emission of the banking system is an increase in the monetary base of the central bank. The monetary base consists primarily of the total cash in circulation and the total reserves (required and excess) of commercial banks held in accounts at the central bank. The Central Bank, through refinancing operations (lending to banks, the government and other sectors of the economy), as well as when purchasing foreign currency, increases the monetary base. They can increase the monetary base and the operations of the central bank on banknote (treasury) issue. The value transferred to the central bank as a result of the central bank's monopoly on creating the monetary base is seigniorage. These revenues from creating the monetary base can be expressed as a sum or as a percentage of GDP. As a result of the creation (increase) of the monetary base, commercial banks are able to use these sources to conduct their active operations, thereby participating in the process of non-cash emission. The volume of non-cash funds created by commercial banks depends on the amount of excess (free) reserves that they use for their active operations. The emission mechanism operates on the basis of the banking (credit, deposit) multiplier.
Bank multiplier– growth of the money supply occurs due to interest on loans provided. This is the process of increasing (multiplying) money in the deposit accounts of commercial banks during the period of their movement from one commercial bank to another. Each bank can issue a loan no more than the amount of its excess (free) reserves. During the lending process, this amount enters the borrower’s accounts in another bank, thereby increasing the volume of his deposits, which means that free reserves for lending are created, which will ultimately lead to an increase in deposits, excess reserves of the third bank, etc. As a result, the deposit multiplier reflects the multiple expansion of commercial banks' deposits and their use for lending operations. The free reserve (resource) consists of the free reserves of individual commercial banks. The credit multiplier reveals that multiplication can occur as a result of lending.
The bank multiplier also operates in other cases, for example, when loans are provided not only to bank clients - business entities, but also to other banks, the government, and during other active operations (purchase of securities).
Managing the banking multiplier mechanism, i.e. emission of non-cash money is carried out by the central bank, as it expands or narrows the issuing capabilities of commercial banks.
2) cash issue represents their release into circulation, which increases the amount of cash. Technically, this means moving currency from the central bank's reserve fund to its working cash. The central bank usually has the monopoly right to issue cash within the country. Cash enters the economy in the process of lending by the central bank to commercial banks, purchasing government securities, foreign currency and gold.
Banknotes issued for circulation are an unconditional obligation of the central (issuing) bank and are backed by all its assets: inventory, gold, other precious metals, freely convertible currency, securities and other liabilities. The security of banknote (treasury) issue directly affects the stability (sustainability) of the national monetary unit.
In a market economy, central banks predict the size of the expected issue and other parameters of cash circulation. In particular, the total volume of cash turnover, the direction of cash flows, the distribution of the money supply in the country, and its aggregates are determined.
A consolidated forecast of cash turnover in the Republic of Belarus is compiled by the National Bank of the Republic of Belarus. For this purpose, data from the forecast of the main directions of the country's socio-economic development are used, as well as data from the cash turnover of banking institutions. At the same time, the National Bank attracts additional data: forecast calculations of retail trade turnover, public catering, volume of payment services (in cash), data from communications authorities, insurance, statistics, the Ministry of Finance, tax authorities and others related to the formation of cash turnover.
Cash is essentially transformed from non-cash money held in accounts and represents an integral part of the money supply
(M0). Enterprises receive cash from their accounts to pay wages, so cash comes into circulation.
Topic 12. Credit system
22.10.2018 09:16
Money supply concept
The money supply is the volume of the state reserve of money in ruble equivalent, serving the cash flows that form money circulation.
Money supply is the totality of money circulating in a country’s economy in a certain period of time, both cash and non-cash, located in current and savings accounts. In other words, it is the total amount of money in circulation in a certain period of time. Thus, the total money supply includes non-cash and cash money.
The cash supply includes:
- small coin;
- paper money (treasury bills, banknotes);
- credit funds (checks, bills).
Non-cash money supply is taken into account:
- on debit and credit plastic cards;
- on deposits;
- on settlement and current accounts;
- in electronic money.
Countries that demonstrate a favorable economic situation have predominantly non-cash cash flows. The volume of cash in circulation by citizens and other participants in the national market is no more than 5% of the total money supply. In states with a banking system of low reliability and insufficiently developed market relations, the ratio of non-cash and cash money supply is radically different. The more cash on hand, the lower the level of the market economy.
Dynamics of the share of cash in the total money supply of Russia
| On the date | Share of cash in money supply (M2) |
|---|---|
| 01.01.2009 | 29% |
| 01.01.2010 | 26% |
| 01.01.2011 | 25% |
| 01.01.2012 | 25% |
| 01.01.2013 | 24% |
| 01.01.2014 | 22% |
| 01.01.2015 | 23% |
| 01.01.2016 | 21% |
| 01.01.2017 | 20% |
| 01.01.2018 | 20% |
| 01.01.2019 | 20% |
| 01.04.2019 | 19% |
Despite the fact that the structure of the monetary volume has changed in recent years, and the cash ratio has decreased by 10%, the shadow economy in the Russian Federation is thriving, since the level of cash is not yet low enough. The reluctance of the population to place free capital in bank accounts indicates their distrust in the banking structure in particular, and in the credit and financial policy of the state in general.
Money supply structure
In the structure of the money supply, one can distinguish an active part, which is formed by real funds directly involved in economic turnover, and a passive part, formed by funds in accounts that could potentially be settlement funds. However, not all components of the passive part can be used as a calculation tool.
Monetary aggregates M0, M1, M2, M3, M4
The principle of constructing the money supply is based on the decreasing liquidity of the assets included in its composition. The composition and structure of the cash money supply is characterized by monetary aggregates. The hierarchical structure of monetary aggregates assumes that each subsequent aggregate includes the previous one. From country to country, there may be differences in the definition and classification of each unit.
Monetary aggregates- types of money and funds that differ in their level of liquidity (the ability to quickly convert into cash), an indicator of the structure of the money supply. They are measures of the money supply, depending on the type of account in which they are located.
The Central Bank of the Russian Federation calculates monetary aggregates M0, M1, M2, M3.
Money supply M0- this is cash circulating in the economy (paper banknotes and metal coins), which is the most liquid part of the money supply.
Money supply M1= M0 (cash) + other cash equivalents that can be easily converted into cash (checks, household funds on demand deposits, funds on settlement, current and other demand accounts of non-financial and financial organizations (except credit)), expressed in national currency.
Money supply M2= M1 + short-term deposits (time deposits, funds in time deposit accounts attracted from the public, non-financial and financial organizations (except credit)) in national currency and some money market funds. The monetary aggregate M2 is money supply in the national definition of Russia.
Money supply M3= M2 + long-term deposits, government loan bonds, treasury savings bonds, certificates of deposit.
Money supply M4 calculated in some countries such as the UK. Monetary aggregate M4 = M3 + all monetary components and monetary surrogates with lower liquidity, a portfolio of government securities held by non-bank holders.
Narrow and wide money
Narrow money- a term defining the most liquid instruments. Most often characterized by M0 or M1 units, depending on the country.
Big money- a term that defines the entire set of assets that can be used to make payments. The definition of broad money also varies from country to country, but in general it is instruments that can be accessed in more than 24 hours.
Volume of money supply in Russia by year
Dynamics of money supply (M2) at the beginning of 2008 - 2019, 2nd quarter. 2019 according to the Bank of Russia (CBRF)
| Period | Money supply (M2), billion rubles. | including: |
|
|---|---|---|---|
| Cash (M0) | Non-cash funds |
||
| 2008 | 12869,0 | 3 702,2 | 9166,7 |
| 2009 | 12 975,9 | 3 794,8 | 9 181,1 |
| 2010 | 15 267,6 | 4 038,1 | 11 229,5 |
| 2011 | 20 011,9 | 5 062,7 | 14 949,1 |
| 2012 | 24 204,8 | 5 938,6 | 18 266,2 |
| 2013 | 27 164,6 | 6 430,1 | 20 734,6 |
| 2014 | 31 155,6 | 6 985,6 | 24 170,0 |
| 2015 | 31 615,7 | 7 171,5 | 24 444,2 |
| 2016 | 35 179,7 | 7 239,1 | 27 940,6 |
| 2017 | 38 418,0 | 7 714,8 | 30 703,2 |
| 2018 | 42 442,2 | 8 446,0 | 33 996,2 |
| 2019 | 47 109,3 | 9 339,0 | 37 770,3 |
| 01.04.2019 | 46 140,0 | 8 980,6 | 37 159,5 |
Dynamics of monetary aggregates M0, M1, M2 at the beginning of 2011 - 2019, 2nd quarter. 2019 according to the Bank of Russia (CBRF)
| Period | Cash in circulation outside the banking system (money supply M0) | Transferable deposits | Money supply M1 | Other deposits included in the M2 monetary aggregate | Money supply in national definition (M2 monetary aggregate) |
|---|---|---|---|---|---|
| 1 | 2 | 3=1+2 | 4 | 5=3+4 |
|
| 2011 | 5 062,7 | 5 797,1 | 10 859,9 | 9 152,0 | 20 011,9 |
| 2012 | 5 938,6 | 6 818,3 | 12 756,9 | 11 447,9 | 24 204,8 |
| 2013 | 6 430,1 | 7 264,0 | 13 694,0 | 13 470,6 | 27 164,6 |
| 2014 | 6 985,6 | 8 526,3 | 15 511,9 | 15 643,7 | 31 155,6 |
| 2015 | 7 171,5 | 8 170,0 | 15 341,4 | 16 274,3 | 31 615,7 |
| 2016 | 7 239,1 | 9 276,4 | 16 515,6 | 18 664,1 | 35 179,7 |
| 2017 | 7 714,8 | 9 927,6 | 17 642,4 | 20 775,6 | 38 418,0 |
| 2018 | 8 446,0 | 11 062,8 | 19 508,9 | 22 933,3 | 42 442,2 |
| 2019 | 9 339,0 | 12 285,1 | 21 624,1 | 25 485,2 | 47 109,3 |
| 01.04.2019 | 8 980,6 | 11 830,1 | 20 810,6 | 25 329,4 | 46 140,0 |
By analyzing the dynamics of the money supply, it is possible to determine the economic state of the country. From 2008 to 2019, there was an average increase in the money supply of 13%, and in the crisis year of 2008 its value was close to 1%, while in 2011 it was 31%. During 2013-2018. the growth rate dropped from 12% to 2.2%, which indicates the presence of measures on the part of the Central Bank to reduce inflation. The flip side may be evidence that a crisis is growing in the country.
Money supply of Russia in 2018 and as of April 1, 2019
Statistics from the Central Bank of the Russian Federation state that at the end of 2018, the aggregate M2 = 47,109.3 billion rubles, which is higher than the value at the beginning of the year by 6,667.1 billion rubles. or 11%. In the first quarter of 2019, the money supply decreased by 2.1% compared to the beginning of the year. However, given the annual increase in M2, we can expect its increase in 2019.
The dynamics of the growth of cash outside the banking system in 2018 indicates that they increased by 10.57%. In the first quarter of 2019, the volume of cash (M0) decreased from 9,339 billion by 3.8% (in monetary terms - by 358.4 billion rubles) and amounted to 8,980.6 billion rubles.
Bank deposits of the population in 2018 also showed an increase of 10.87% and amounted to 20,643 billion rubles. As of April 1 of this year, the volume of funds on such deposits decreased slightly - by 0.7% and amounted to 20,857 billion.
Statistical data indicate that cash (M0) located outside the banking system still accounts for a fairly large percentage of the monetary volume. Despite the fact that the share of cash in the money supply continues to decline, citizens of the Russian Federation continue to spend a lot of cash on purchases, neglecting such payment instruments as plastic bank cards. At the same time, the increase in deposit funds compared to last year is a positive indicator, indicating a successful monetary policy of the state credit apparatus.
Monetization rate
The monetization coefficient is an indicator characterizing the economy’s need for money supply. In a state with a positive economic situation and a minimum inflation rate, this figure is at least 50%. In the Russian Federation, the monetization level for 2018 was 43.2%, which indicates insufficient development of the market economy.
Money supply in different countries
Dynamics of the M2 money supply 2008 - 2019 according to the websites of National Banks, in national currencies
| Money supply M2, billions of national currency |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 |
|
| USA, USD | 8265,30 | 8550,50 | 8822,50 | 9692,30 | 10500,10 | 11067,30 | 11728,00 | 12416,10 | 13292,60 | 13937,30 | 14473,00 |
| Great Britain, GBP | 1842,49 | 1906,96 | 2092,59 | 2047,98 | 2058,13 | 2088,29 | 2086,85 | 2134,84 | 2284,26 | 2347,84 | 2419,58 |
| Germany, EUR | 1859,90 | 1849,30 | 1930,50 | 2062,50 | 2220,40 | 2285,20 | 2399,20 | 2605,80 | 2755,90 | 2880,60 | 3019,30 |
| France, EUR | 1357,77 | 1353,65 | 1456,29 | 1514,03 | 1600,46 | 1645,36 | 1707,73 | 1786,38 | 1880,62 | 2047,61 | 2161,91 |
| Japan, JPY | 741700,0 | 764400,0 | 782300,0 | 806900,0 | 827700,0 | 862800,0 | 893100,0 | 920600,0 | 956300,0 | 990600,0 | 1014200,0 |
| Brazil, BRL | 1086,79 | 1185,87 | 1387,91 | 1649,90 | 1792,89 | 1985,47 | 2186,47 | 2334,14 | 2446,07 | 2581,70 | 2848,57 |
| India, INR | 11499,91 | 13557,57 | 16205,66 | 17296,53 | 18501,19 | 20296,91 | 22339,79 | 25149,05 | 20883,21 | 29891,20 | 34088,53 |
| China, CNY | 47516,66 | 60622,50 | 72585,18 | 85159,09 | 97414,88 | 110652,50 | 122837,48 | 139227,81 | 155006,70 | 169023,53 | 182674,42 |
| South Africa, ZAR | 1562,43 | 1589,34 | 1678,42 | 1798,93 | 1869,05 | 2049,69 | 2226,54 | 2441,53 | 2601,20 | 2806,03 | 2893,83 |
| Russia, RUB | 12 975,9 | 15 267,6 | 20 011,9 | 24 204,8 | 27 164,6 | 31 155,6 | 31 615,7 | 35 179,7 | 38 418,0 | 42 442,2 | 47 109,3 |
Dynamics of the M2 money supply 2008 - 2019 according to the websites of National Banks, converted into US dollars at official rates
| A country | Money supply M2, billion US dollars |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 |
|
| USA | 8265,30 | 8550,50 | 8822,50 | 9692,30 | 10500,10 | 11067,30 | 11728,00 | 12416,10 | 13292,60 | 13937,30 | 14473,00 |
| Great Britain | 995,94 | 1214,62 | 1350,06 | 1279,99 | 1294,42 | 1338,65 | 1264,75 | 1395,32 | 1692,04 | 1820,03 | 1819,23 |
| Germany | 2734,05 | 2570,53 | 2567,57 | 2866,88 | 2864,32 | 3039,32 | 3190,94 | 2892,44 | 3059,05 | 3255,08 | 3562,77 |
| France | 1995,91 | 1881,57 | 1936,87 | 2104,49 | 2064,59 | 2188,33 | 2271,27 | 1982,88 | 2087,49 | 2313,80 | 2551,05 |
| Japan | 7173,81 | 8159,69 | 8912,05 | 10124,22 | 10369,58 | 8840,16 | 8446,19 | 7605,12 | 8798,42 | 8832,81 | 9191,59 |
| Brazil | 465,03 | 681,06 | 832,98 | 879,57 | 877,36 | 847,55 | 823,16 | 597,76 | 750,53 | 780,44 | 735,15 |
| India | 237,36 | 290,44 | 361,65 | 324,72 | 337,75 | 327,91 | 352,74 | 379,17 | 307,31 | 467,58 | 488,96 |
| China | 6967,25 | 8875,92 | 10997,75 | 13538,81 | 15636,42 | 18289,67 | 19812,50 | 21485,77 | 22303,12 | 25963,68 | 26551,51 |
| South Africa | 167,94 | 215,59 | 253,45 | 221,22 | 220,31 | 195,82 | 192,41 | 156,77 | 190,87 | 228,24 | 200,80 |
| Russia | 437,00 | 453,42 | 599,30 | 680,83 | 814,58 | 882,19 | 535,78 | 449,28 | 600,64 | 696,43 | 646,20 |
The money supply of all countries tends to increase, but no country experiences such growth as China. Since 2008, the volume of M2 in this country has increased 3.8 times, far surpassing the United States in absolute terms. During the same period, the US money supply increased by $6,206.7 billion, or 1.75 times.
Money supply control
At the legislative level, regulation of the money supply (non-cash and cash) is carried out by the Central Bank of the Russian Federation.
Directions of money supply control policy:
- conducting an effective monetary policy;
- public debt management;
- implementation of tax policy;
- formation of the financial market;
- control over the money supply during the implementation of monetary policy.
The instruments for regulating the money supply include the following:
Open market operations as the main regulatory tool. It is applied through influencing the volume of resources of commercial banks through the purchase and sale of treasury bills, government bonds and other securities with a reverse transaction after a certain time. By purchasing such securities, commercial banks reduce the amount of funds that they can use to lend to clients, which ultimately leads to an increase in loan interest. When selling securities back to the Central Bank, banks attract additional resources.
Motto operations consisting of the purchase and sale of foreign currency by the Central Bank in order to maintain the exchange rate of the national currency, prevent its sharp fluctuations and counteract the speculative sentiments of market participants.
Deposit operations of the Bank of Russia used to manage excess liquidity of commercial banks. These operations allow the Central Bank to quickly attract banks' free funds into deposits, quickly neutralizing their possible pressure on the foreign exchange market, thereby preventing the depreciation of the national currency and rising inflation.
The discount rate policy (discount policy), which consists in regulating the interest on loans attracted by commercial banks from the Bank of Russia. The increase in the rate on accounting and lending operations is intended to limit the rate of inflation growth by “compressing” the money supply in circulation.
Changes in the required reserve ratio established by the Central Bank. Its increase leads to the fact that a significant part of bank funds is “blocked” in the accounts of the Central Bank and, accordingly, cannot be used by banks to issue loans. As a result, the money supply in circulation is reduced.
A set of measures associated with the Central Bank’s withdrawal of excess available funds from the economy is called sterilization of the money supply. This is carried out due to the fact that such a surplus of money can cause inflation and other negative processes in the country’s economy.
The main achievement of modern economic science in matters of measuring the money supply is monetary aggregates concept, characterizing the structure of the money supply, making it possible to identify the features, trends and patterns of movement of its individual components according to the criterion of performing a particular function of money. The main principle within this concept is aggregation - generalization of the elements of the money supply according to the criteria of their liquidity: from absolute to minimal.
Money supply- this is an indicator reflecting the totality of funds with their inherent degree of liquidity.
Principles of forming a system of monetary aggregates:
- each subsequent unit includes the previous one;
- the degree of liquidity of each subsequent unit is less than the previous one;
- the degree of profitability of each subsequent unit is greater than the previous one.
The last principle needs clarification. Increasing returns with decreasing liquidity are a consequence of the existing relationship between liquidity and profitability. On the one hand, the low liquidity of an asset implies the existence of costs for converting it into money, which must be covered by the corresponding income. On the other hand, refusing to use money and investing it in less liquid money, i.e. refusal of consumption or use in the current period implies receipt of compensation - income from refusal to use the good in the present. The forms of income then include interest on time deposits, coupon income on government bonds, and derivative financial instruments.
In general, the structure of the money supply includes the following aggregates:
- M 0 - cash in circulation;
- M, = M 0+ funds in settlement, current accounts, checking accounts, in some cases - credit cards.
In other words, the unit M x includes a set of cash and liquid assets that do not require conversion into money as a medium of exchange, conversion and other operations; does not imply costs for using money as a medium of exchange. Consequently, this unit focuses on that part of the money supply within which money performs the function of a means of circulation and payment. This unit can be used (and has been used) as an object of monetary regulation in economies with a high share of cash in circulation. An example is targeting the monetary aggregate M ( in the USA until the 1950s. with subsequent transition to targeting the M2 aggregate;
M 2 = M (+ funds in savings accounts (for up to three years) with a high degree of liquidity.
This aggregate also includes funds in fixed-term accounts and is characterized by an increased return on less liquid assets. The main focus within this unit is on the function of money as a store of value. In a number of developed countries, this unit was used as an object of monetary regulation (for example, in the USA - until the end of the 1970s). The use of this aggregate for the purposes of monetary policy implies an increase in the share of non-cash money in circulation, an increase in the rate of consumption and savings in the national economy, an increase in the role of stock markets, as well as an increase in the dependence of players’ actions on interest rates and profitability. So, in the USA the unit M 2 consists of M, (26% - cash and check deposits) and funds in savings and time accounts (74%);
- M 3 = M 2 + funds on time deposits with a longer duration (from three years or more), certificates of commercial banks, government bonds, securities in circulation on the money market;
- M A = M 3 + other deposits in credit institutions. In the US, it includes the total amount of loans issued by banks, as well as the amount of government borrowing.
The domestic system for measuring the money supply is based on the identification of two elements:
- 1) cash in circulation;
- 2) non-cash money - funds of organizations (except credit) and individuals in deposit accounts and other demand accounts, as well as in time accounts opened in banks of the Russian Federation.
In Russia, monetary aggregates M 0 are used, M ( , M 2 and the “monetary base” indicator.
The monetary base is not a generally recognized aggregate of the money supply, but is in a certain connection with the monetary aggregate M0. In addition to cash in circulation, the monetary base includes cash in the cash desks of credit institutions, as well as accounts of credit institutions with the central bank. The monetary base can also include other obligations of the central bank to organizations and government bodies.
The monetary base as a whole meets the requirements of the transaction approach and is the most liquid indicator of the money supply in the national economy. The monetary base is under the control of the monetary authorities through management of the norms for reserving funds of commercial banks in the accounts of the central bank, control of the central bank over correspondent accounts of commercial banks, etc.
The monetary base in a broad definition according to Russian methodology includes:
- cash issued by the central bank and funds in the cash desks of credit institutions;
- funds in mandatory reserve accounts for funds attracted by credit institutions deposited with the central bank;
- funds in correspondent accounts in the national currency of the Russian Federation;
- investments of credit institutions in central bank bonds;
- other obligations of the central bank for transactions with credit institutions.
However, despite the multiplicity of monetary aggregates, the question of choosing the optimal aggregate for measuring the money supply and managing the money market remains open. The choice of the optimal monetary aggregate must meet a number of conditions:
- 1) the money supply indicator should optimally reflect the relationship with economic processes;
- 2) the money supply indicator must take into account the features and specifics of the speed of circulation of money in the economy;
- 3) the money supply indicator must take into account and reflect the patterns and features of movement inherent in the economic and monetary spheres (such as, for example, the cyclical nature of the economic and monetary sphere, the stability of the velocity of money circulation in the long term and its cyclical fluctuations in the medium term);
- 4) the money supply indicator should not only optimally reflect the patterns of the monetary and economic spheres, but also become the object of monetary regulation in order to maintain the stability of the movement of the country’s monetary and economic systems.
Violation of at least one of these requirements casts doubt on the effectiveness of the selected monetary aggregate for measuring and managing processes occurring in the monetary sphere.
Thus, the question of measuring the money supply and determining its optimal volume in accordance with trade turnover requires taking into account another characteristic of money circulation - the velocity of circulation of money. This indicator should be optimally reflected using the selected monetary unit. Otherwise, quality management of the money market may not be achieved.
The most important quantitative indicator of money circulation is the money supply, which is the total volume of purchasing and payment means serving economic turnover and owned by individuals, enterprises and the state.
The money supply is a set of cash and non-cash purchasing and payment means that ensure the circulation of goods and services in the national economy, which is available to individuals, institutional owners and the state. The structure of the money supply is divided into an active part, which includes funds that actually serve economic turnover, and a passive part, including cash savings and account balances that can potentially serve as settlement funds.
Thus, the structure of the money supply is quite complex and does not coincide with the stereotype that has developed in the minds of the average consumer, who considers cash primarily as money - paper money and small change coins. In fact, the share of paper money in the money supply is very low (less than 25%), and the bulk of transactions between entrepreneurs and organizations, even in retail trade, are carried out in a developed market economy through the use of bank accounts. As a result, the era of bank money - checks, credit cards, traveler's checks, etc. has arrived. These payment instruments allow you to manage cash deposits, i.e. non-cash money. When paying for goods and services, the buyer, using a check or credit card, orders the bank to transfer the purchase amount from his deposit to the seller's account or give him cash.
At the same time, the structure of the money supply also includes components that cannot be directly used as a means of purchase or payment. We are talking about funds in time accounts, savings deposits in commercial banks, other financial institutions, certificates of deposit, shares of investment funds that invest only in short-term monetary obligations, etc. The listed components of monetary circulation are collectively called “quasi -money". Quasi-money represents the most significant and rapidly growing part in the structure of monetary circulation.
Economists call quasi-money liquid assets. The liquidity of any property or assets is understood as their ease of sale, the possibility of their circulation in monetary form without loss of value. Therefore, the most liquid type of asset is money. Highly liquid types of property include gold, other precious metals, precious stones, oil, and works of art. Buildings and equipment have less liquidity.
To analyze quantitative changes in money circulation on a certain date and for a certain period, as well as to develop measures to regulate growth rates and the volume of money supply, various indicators (monetary aggregates) are used.
In financial statistics of industrialized countries, the following set of basic monetary aggregates is used to determine the money supply:
Aggregate M-1 - includes cash in circulation (banknotes, coins) and funds in current bank accounts;
Aggregate M-2 - consists of aggregate M-1 plus time and savings deposits in commercial banks (up to four years);
Unit M-3 - contains unit M-2 plus savings deposits in specialized credit institutions;
Unit M-4 - consists of unit M-3 plus certificates of deposit of large commercial banks.
In the USA, four monetary aggregates are used to determine the money supply, in Japan and Germany - three. in England and France - two.
Analysis of the structure and dynamics of the money supply is important when central banks develop monetary policy guidelines.
To calculate the total money supply in circulation in the Russian Federation, the following monetary aggregates are provided:
Unit M-0 - cash;
Aggregate M-1 - equal to aggregate M-0 plus settlement current and other accounts (current accounts, special accounts, capital investment accounts, letters of credit and check accounts, local budget accounts, accounts of budgetary, trade union, public and other organizations, State Insurance funds, fund long-term lending); plus deposits in commercial banks; plus demand deposits in Sberbank;
Aggregate M-2 - equal to aggregate M-1 plus time deposits in Sberbank;
Aggregate M-3 is equal to aggregate M-2 plus certificates of deposit and government bonds.
The use of various indicators of the money supply allows for a differentiated approach to the analysis of the state of money circulation.
A change in the volume of money supply can be the result of both a change in the mass of money in circulation and an acceleration of its turnover. The speed of circulation of money is an indicator of the intensification of the movement of money when it functions as a means of circulation and a means of payment. It is difficult to quantify, so indirect data is used to calculate it.
In industrialized countries, two indicators of the rate of growth of money turnover are mainly calculated:
The indicator of the speed of circulation in the circulation of income is the ratio of the gross national product (GNP) or national income to the money supply, namely to the M-1 or M-2 aggregate, this indicator reveals the relationship between money circulation and economic development processes;
The indicator of money turnover in payment circulation is the ratio of the amount of transferred funds in bank current accounts to the average value of the money supply.