Monetary base

The term monetary base (also monetary base, the monetary base, base money or money supply M0 ) means the amount of money that the issuer (which is usually the central bank ) was circulated and is not cash a commercial bank.

The monetary base represents liabilities of the central bank to commercial banks and non-banks; they shall be composed of the cash and deposits ( eg minimum reserves) of commercial banks at the central bank.

The term monetary base represents the dependence of the money supply of an economy from a base, the central bank money. It is titled as a high powered money, because an increase in the monetary base, the entire money supply can not increase to the same extent, but many times.

Definition

The monetary base consists of the following monetary components:

• From the minimum reserves, ie the volume of the prescribed compulsory deposits of banks with the central bank
• From the excess reserves, that is to go beyond the minimum reserve for voluntary deposit including cash holdings of commercial banks
• From cash holdings of commercial banks and non-banks (companies, households and the public sector ).

Since the commercial banks are dependent for their creation of money over if the required reserve on the monetary base, the central bank controls the monetary base over the entire M3. According to the quantity equation that amount of money is the most important factor influencing the general price level.

Corrected monetary base

The monetary base in the broadest sense includes all items that match the liabilities side ( and uses) the central bank balance sheet. So all the positions, the amount of which can affect the central bank by issuing cash and Determination of minimum reserves. However, according to the prevailing opinion of deposits include the public sector, the foreign and domestic non-banks not determinable these positions. To understand the monetary policy actions of the central bank easier, a narrower definition is given. The central bank money from the expenditure side can be influenced for example by dissolving the domestic money market instruments. The commercial banks, thereby increasing their liquidity of central bank money. These influenced by the banks monetary base is referred to as the corrected base money.

Before the introduction of the euro (1999), the monetary base was reduced by rediskontierte change and Lombard liabilities in Germany. Here is also spoken by a corrected base money. If the base is measured at constant reserve ratios, it is also called the adjusted monetary base.

The economic importance of the monetary base

Economic agents ( non-banks ) need central bank money due to the cash function. Commercial banks need it because of the processing function by the reserve requirement. Both functions are performed by the monetary base.

The various definitions of money supply (also monetary aggregates, M1, M2, M3 ) show that money in addition to the cash issued by the Central Bank in particular includes the deposits provided by the commercial banks. The creation of new bank deposits by commercial banks, thus increasing the money supply is only possible if they have a sufficient stock of base money.

Net bank claims on non-residents

• Money capital
• Central bank domestic public
• Other influences

Savings deposits redeemable at notice, savings bonds, bank debt, capital and reserves of banks

The banks and the Bundesbank

Domestic non- banks with banks statutory notice

Time deposits of domestic non - banks with banks with a maturity of up to under 4 years

Of interbank liabilities

On domestic liabilities at constant reserve ratios

Coins and banknotes without cash held by banks

Domestic non - banks with banks

On cash deposits

Domestic public

Central Bank definitions of money:

• Current central bank money, the central bank money in circulation is in the narrower sense (also ZBG 0)
• Potential central bank money: all central bank eligible assets, ie those assets that can be converted by banks at any time and without significant losses at the central bank in recent central bank money ( esp. eligible for central bank money market securities)
• Central bank money in the broader sense comprises the current and potential central bank money
• Monetary base as defined in the Federal Bank ZBG 1 includes cash holdings of non-bank and the reserve requirements of credit institutions on their liabilities to residents, calculated at the in January 1974 in force, average reserve requirement rates ( 16.6% for visual, 12.4% for appointment and 8.1 % for savings deposits). This money can be used as an indicator of monetary expansion.
• Monetary base in the delimitation of the Advisory Council ZBG 2 covers the entire cash holdings, the reserve requirements of the relevant minimum reserve requirements and excess reserves. Sets the dar. for monetary expansion necessary base money

Monetary base concept as an approach to the money market theory

The money market theory deals with the question of what factors the amount of money offered is determined. Therefore, it deals with the providers of money. Following the creation of the actual money supply (M) is explained. A prerequisite for this is that you meet various behavioral equations of the money and credit creation process and integrates. The following two models are distinguished as monetarist approaches of money supply theory:

• Monetary base concept
• Credit Market Theory

The monetary base concept differs from the traditional credit and Giralgeldschöpfungstheorie among other things, that it no longer comes to the maximum possible money creation, but

• The total actual money supply
• Its determinants
• And their suggestibility by the central bank.

The starting point is an equation in which the actual money supply ( M) as the supply of money multiplier ( m) and the monetary base (Z ) is defined.

The following applies:

If the central bank deposits of non-banks neglected ( NB), there is the monetary base from the central bank of the commercial banks ( B) and the cash of non-banks:

If the narrow definition used for the M1 money supply, then:

From equation (1 ) follows:

Equations (2 ) and ( 3 ) are used in this expression, we obtain:

The central bank of banks to those liabilities of the bank's balance sheet, which are subject to reserve requirements, expanded:

If the numerator and the denominator divided by SE, as is:

As a result of the money supply multiplier:

Here, the following definition shall apply

• The cash coefficient
• Of time deposits coefficient
• The savings coefficient
• The reserve ratio of banks

Formula (7) is inserted into equation (1) and the result is:

It follows that the actual money supply is the result of decisions taken by non-banks, banks and the Central Bank.

The monetary base concept provides the basis for empirical studies that should clarify from which groups pose a decisive influence on the development of the money supply. Results of monetary policy studies show that the monetary base is the main factor influencing the money supply. The monetary base is under the control of the central bank, which is thus able to control the money supply of the commercial banks through appropriate monetary base control. The control is done via open market operations. Approach is that money creation by commercial banks to control not by the direct change in the monetary base (currency creation, establishing the minimum reserve ratios ), but to influence on the interest rate for securities transactions of commercial banks with the central bank's available in commercial banks liquidity. This has the advantage that fluctuations in interest rates on the money market and thereby caused confusion can be avoided in the financial markets.

However, towards approaches could result from existing extensive recourse to the banks on central bank money or the intervention of the Central Bank obligation under fixed exchange rates. In addition, a stable money supply multiplier (the case in the Federal Republic over time not ) is required, which allows predictable effects of changes in the monetary base on the money supply.

Problems of control of the monetary base

Influences on the monetary base can generally by the following parties arise:

• Central bank
• Public sector
• Private non-banks
• Commercial banks

Central banks control the money base, primarily through open market operations (also main refinancing operations ), while bonds and base money are traded. When there is monetary base, the price level is crucially influenced by the demand for base money. In the past, but also in the presence of these changes in demand have been caused by banking crises. These were characterized by an exaggerated increase in the demand for currency by non-banks and the banks' demand for excess reserves. Countermeasure could be a deposit insurance, but this increases the risk of risky lending by financial institutions.

External influences on the control of the money supply

Especially when for political reasons between countries to maintain certain, almost fixed exchange rate ( crawling peg, exchange rate bandwidth, managed floating ) is set as the target, it may be conflicts between monetary and exchange rate policy objectives. If the currency of a country coupled in such a way to another, the domestic central bank must intervene if necessary (eg foreign exchange intervention ) in order to keep the exchange rate stable.

Through this foreign exchange intervention increases the central bank ( from a monetary policy perspective undesirably ) the monetary base (if the currency is under pressure to appreciate ) or reduces the monetary base (if the currency is under pressure to devalue ).

An example of such a trade-off provided by the European Monetary System (EMS ), which until 1993 between the participating countries, the obligation existed, the exchange rates of their currencies to any other currency at an interval of ± 2.25% to keep. During the two EMS crises extensive support purchases for the French franc, pound sterling and the Italian lira, with peaks of up to 26 billion marks per day were necessary. To avoid the unwanted side effects, a strong monetary sterilization was necessary, this was attempted by simultaneous reductions of refinancing loans from the commercial banks.

Fiscal impact on the control of the money supply

In the Weimar Republic the expansionary monetary policy has been used to finance government spending. As a result, the price level rose, it came to hyperinflation and the economic system collapsed. To avoid strong fiscal influences on monetary policy, the ECB and the national central banks in the United States may not grant loans in the European Monetary Union. Similar regulations now exist in other countries. Because of this growing independence of central banks fiscal influences today are largely excluded.

Monetary stimulus and the changes in the monetary and credit volume

This monetary stimulus over the monetary base on the volume of credit depend on the macroeconomic environment and behavior of economic agents. Because of the developments in the monetary base and credit growth are not directly connected to each other. Only extreme changes in the monetary base in narrow liquidity scope of business entities and banks lead to a transmission of the pulses on the volume of credit.