The cash that is located outside the system of banks, as well as the reserve of commercial banks, which is stored in the Central Reserves, is called the monetary base.
Cash is the immediate partmoney supply, and bank reserves affect the ability of each of the banks to create new deposits, thereby increasing the money supply. The Central Bank is able to control the money supply mainly by influencing the monetary base. Its change has a multiplier effect on the money supply.
Consequently, the very process of changing the money supply can be divided into two stages:
- Initially, the monetary base is modified by introducing changes in the CB's obligations to the system of banks and the population (influence on the size of reserves and cash).
- Further change in the money supply through the multiplication process among commercial banks. Both the monetary base and the multiplier are influenced by the instruments of monetary policy.
For modern money systems is characteristiceffective performance of the functions assigned to them only if the optimal amount of money in circulation is maintained (in accordance with the needs of the economy). A determines this level and regulates the release of money into circulation by the Central Bank.
To do this, you need to use indicators that will express the money supply:
- Money supply is all moneynational economy, which are in circulation, both in cash and in non-cash forms. Its scope is influenced by many factors: the volume of GDP and the rate of economic growth, the structure of the financial and credit-banking system, their level of development, the ratio of cashless and cash turnover of money, monetary, financial and monetary policy of the country, the speed with which they apply money, the balance of payments of the state and the like.
- The monetary base is a measure of monetarypolicy of the state, which is used to calculate the money supply. In the past, there was a so-called "gold standard" - this is to provide all the country's money with gold. Then the monetary base was equal to the volume of the gold reserve.
Now the states have stopped providing theircurrency in gold, introduced the concept of non-exchangeable gold for loan funds. The very meaning of the concept of "monetary base" has also changed. As already mentioned above, the funds that are included in this stock, in fact, can use commercial banks as a source of additional money for circulation. For this reason, Western economic literature refers to the funds that make up the monetary base of the Central Bank - "money of increased capacity."
What role does the money supply and monetary base play in organizing the country's money turnover?
This question is convenient to consider, taking as a modelbalance of the Central Bank. Reserves and banknotes of commercial banks, which are stored in the Central Bank, constitute a monetary base and are, in fact, monetary obligations of the Central Bank, and therefore are indicated in its liabilities. At the same time, they are the resource of the Central Bank.
The asset reflects the distribution of resources of the Central Bank.The specificity of his operations with assets is such that he acts as a lender only for commercial banks and the government of the state. When the Central Bank issues loans to these borrowers, it essentially credits the economy.
Volume of actual cash in circulationdeveloped countries is rather small and only a few percent relative to the aggregate money supply, but in the monetary base banknotes have a large share, and therefore are for many countries the main source of the CBR's resource.
The reserve of the bank is divided into surplus and mandatory.Mandatory reserve commercial banks are kept in the Central Bank at its request, and redundant at its discretion. But both are also an important component of the monetary base.