Transcript Money supply

Money and Credit
Lecture 5
Regulation of money circulation and
money supply
Content
1. Regulation of money circulation.
2. Money supply.
2.1. Monetary aggregates as a way of measuring of money
supply.
2.2. Peculiarities of construction of money supply indicators in
Ukraine.
2.3. Factors that influence on the volume of money supply.
Main definitions:
o monetary policy
o targeting
o inflation
o currency
o money supply
o monetary aggregate
o monetary base
o …………..
1. Regulation of money circulation
Monetary policy is a set of interrelated, coordinated and
aimed to achieve predetermined social and economic
objectives measures of money market regulation, which
provides state through the central bank of the country.
There are such types of monetary policy by the guide
monetary target:
 monetary targeting regime;
 currency targeting regime;
 inflation targeting regime.
• Monetary targeting regime is a set of measures of
monetary policy, aimed at supporting a stable demand
for money from the society to ensure a predetermined
level of the money supply in circulation.
• Currency targeting regime is a set of measures of
monetary policy, that provides support for the stability
of the exchange rate of certain reserve currency or
basket of currencies.
• Inflation targeting is selection of the most real
inflation indicator, which can be achieved within a
specified time period, using the tools of monetary
policy and communication channels.
2. Money supply.
2.1. Monetary aggregates as a way of measuring of
money supply.
Money supply is a set of money in all forms, which are in an
economic turnover for a specified period of time (end of
month or year).
The basis for consideration of money supply is so called the
portfolio method of analysis of using money.
In a market economy, a person has the ability to store the
wealth in various forms, among which money - one of the
possible forms.
It is believed that the liquidity of any kind of property (assets),
including some cash, is directly related to the cost of exchange
for other property. The property with zero costs of exchange
is completely liquid.
The structure of money supply
Money supply
active part
passive part
which is the funds that
actually serve economic
circulation
which includes cash savings,
account balances, which can be
used as a means of settlement
On the structural basis the money supply is
divided into 4 directions:
by the degree of liquidity
by the form of money
by the allocation in certain of the market
by geographical distribution
Monetary aggregates
The monetary aggregate is a defined by
law in accordance with the degree of
liquidity a specific group of liquid assets
that can be used as an alternatives indices of money supply.
Monetary
aggregates
are formed
based on
the
following
concepts:
1) money supply in the narrow sense includes not
only cash, but also deposit money;
2) the total money supply also includes bank
deposits, deposits and securities with fixed income;
3) the total money supply is divided into that which
is in circulation, and that which is accumulating,
acts as a store of value.
Monetary aggregates in Ukraine:
M0 = cash in circulation outside the depository
corporations (banks).
M1 = M0 + transferable deposits in national
currency (M1-M0).
M2 = M1 + transferable deposits in foreign
currency and other deposits (M2-M1).
M3 = M2 + securities other than shares (M3M2).
The monetary base
The monetary base is the money that do not
participate in the credit turnover and money
circulation, but create a base for their
expansion. It includes the monetary aggregate
M0, cash in banks and reserves of commercial
banks on their accounts in the National Bank of
Ukraine.
The velocity of money
The velocity of money turnover is a frequency of
money transition from one entity to another.
Velocity can be measured by the number of turns in a specific
period (usually 1 year) or duration of one turn. Velocity of
money characterizes the overall intensity of economic
processes.
The main indicators, which characterize the velocity of
money, are:
velocity of money in revenues
circulation - ratio of gross
national product (GNP) or
national income to the money
supply
rate of money turnover in
payments, i.e. the ratio of
funds transferred to bank
current accounts to the mean
value of money supply.
To analyze the degree of economy`s supply of
money the indicator of monetization is used. It
is calculated as the ratio of the average value of
the money supply to the nominal value of GDP.
Thus, the rate of monetization is the reverse
value to the velocity of money. The dollarization
ratio is also used; it is measured as the share of
foreign exchange in the money supply.
2.2. Peculiarities of construction of money supply
indicators in Ukraine.
Evolution of money supply in Ukraine
Period
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
total
65 129
95 334
125 705
194 071
261 063
396 156
515 727
487 298
597 872
685 515
773 199
908 994
956 728
total
64 395
94 603
125 483
193 145
259 413
391 273
512 527
484 772
596 841
681 801
771 126
906 236
955 349
total
40 354
53 270
67 090
98 573
123 276
181 665
225 127
233 748
289 894
311 047
323 225
383 821
435 475
M3
M2
M1
М0
26 434
33 119
42 345
60 231
74 984
111 119
154 759
157 029
182 990
192 665
203 245
237 777
282 947
M1–M0
13 920
20 151
24 745
38 341
48 292
70 546
70 369
76 719
106 904
118 382
119 980
146 044
152 528
M2–M1
24 041
41 333
58 393
94 573
136 138
209 608
287 400
251 023
306 947
370 754
447 901
522 416
519 874
M3–M2
734
731
222
925
1 650
4 884
3 200
2 526
1 031
3 714
2 072
2 758
1 379
2.3. Factors that have influence on the volume of
money supply
There are 2 factors affecting the money supply:
 The amount of money.
 The velocity of money.
The amount of money supply is determined by the state the issuer, its legislature.
Meanwhile, the growth of money issue is conditioned by
the need commodity circulation and needs of the state
(the intensity of their movement in the exercise of
functions of treatment and payment).
The velocity of money is influenced by the general
economic factors (cyclical development of
production, production growth, price movements).
Cash monetary factors:
 the structure of payments or the ratio of existing
to cashless money,
 development of credit transactions and cross
payments,
 interest rates on loans on the money market,
 the introduction of computers to carry out
transactions with credit institutions;
 the use of electronic money in the calculations.