Monetary Base - Explained
What is a Monetary Base?
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Table of ContentsWhat is a Monetary Base?What makes up the Monetary Base?Monetary Base and the Money SupplyManaging Monetary BasesSmaller Scale Monetary Bases and Money SuppliesAcademic Research on Monetary Base
What is a Monetary Base?
The money base of a country refers to the total amount of currency that is in circulation or held in the central banks reserves. It is a term used in economics to describe the quantity of money or currency held in the hands of the public or as commercial bank deposits. The monetary base captures the total banknotes and coins.
What makes up the Monetary Base?
It is noteworthy to state that the monetary base only captures the most liquid currencies of a country, that is, the total amount of money (banknotes and coins) that are available for immediate use. While some of these banknotes and coins are in general circulation held by the public, some are held in the central banks reserves as bank deposits. The monetary base of a country can expand from time to time, given that the Federal Reserve can produce additional currency for public circulation or create new funds for bond purchases.
Monetary Base and the Money Supply
While the monetary base only accounts for the most liquid form of a countrys currency such as banknotes and coins, money supply captures a broader perspective. The money supply represents the totality of a countrys monetary base, including other assets in its less liquid forms. To adequately capture the variety of assets, the money supply is categorized into M0, M1, M2, M3 or M4. The total amount of funds in the monetary base is reported under the lower levels of the money supply. Hence, the distinguishing factor between the monetary base of a country and the money supply is that while the former accounts for the most liquid assets available for immediate use in a country, the latter accounts for the totality of a countrys assets, including the less liquid ones.
Managing Monetary Bases
The monetary base of every country is managed or overseen by the country's central bank. The central bank has the duty to expand (increase) or contract (reduce) the monetary base given the peculiarities of the present economic situation. Through adequate monetary policies, the central bank effectively manages the monetary base. In many countries, the open market operations through which the government buys and sells bonds can be used to maintain the desired level of the monetary base.
Smaller Scale Monetary Bases and Money Supplies
The monetary base in its broadest perspective captures the entirety of currency available for immediate use in an economy, this includes banknotes and coins and commercial bank deposits held in central bank's reserves. The money supply captures all the assets, both liquid and less liquid assets owned by a country. The smaller scale of the monetary base applies to the household. It captures the total amount of money (banknotes and coins) in the possession of a particular household. Funds held in deposit accounts are also included in the monetary base. The money supply of a household on the other hand, includes available credit, unused lines of credits and other funds not physically held by the household.