lnc13 - Lecture Notes Companion 13-Money Measures of the...

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Lecture Notes Companion 13--Money Measures of the Money Supply (Monetary Aggregates) Four commonly used measures of the money supply measures of the money supply are show in the table below, with current (as of August, 2009) Federal Reserve estimates for the USA. Estimates, shown in italics, are seasonally adjusted, in billions of dollars. Annualized growth rates for the preceding 3 months are shown in (). $858.3 (4.0%) M0 = coins + currency $1,649.6 (13.8%) M1 = M0 + checkable deposits + travelers checks $8,297.7 (-2.2%) M2 = M1 + small ( $100,000) time deposits $9,538.2 (-1.9%) MZM = M2 - time deposits + money market funds $1,728.1 (-14.9%) Monetary base = bank reserves + currency held by the nonbank public $829.4 (-28.3%) Bank Reserves Source: St. Louis Fed at http http://research.stlouisfed.org/fred2/ Typical growth rates for monetary measures are in the 2 – 9% range. The negative numbers for some of the growth rates shown above represent the Fed’s pullback from the highly expansionary monetary policy it carried out in the fall of 2008, when it threw money at the banking system, especially into bank reserves, in a effort to avoid a full-scale systemic crash. (Bank reserves rose from $45 billion on August 1 to over $800 billion by the first of December. See the rather dramatic graph of this at left.) Despite this frantic money creation, prices are barely rising—core CPI inflation for the year ending August 1 was only 1.5%. The reason is that banks and other borrowers of Fed money are largely still holding on to the cash they have received and not lending. If banks aren’t lending, then households and businesses aren’t spending, and the demand for goods falls. Total bank credit—outstanding loan balances--in the US is falling rapidly at present, from $9,373.9 billion on June 3, 2009 to $9,166.8 billion at the beginning of September. This might not sound like much, but total bank credit almost never falls—see the second graph, below. The last time we saw a decline in bank credit of this scale was in the 1930’s, which is not a good omen. The most commonly cited measure of the money supply is M1, which is often called the narrow money supply . Note that its biggest component is checkable deposits ($), or checking and share draft account deposits. This money exists in the form of electronic records on the hard drives of bank computers. It is not somehow backed up by paper money. If you have $300 in your checking account the money is the record on the bank’s computer. Time deposits are saving accounts, including passbook saving accounts and certificates of deposit (CD’s). Note that there is much more M1 money than M0 money, i.e., a lot of M1 money does not exist as paper bills or coins. M2, often called the broad money supply, is usually a better measure of the money supply for the conduct of monetary policy. Peter Kennedy (1997) explains: . . . M1 is not as closely related to economic activity as M2. One reason for this is that changes in interest rates entice people to switch balances in
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lnc13 - Lecture Notes Companion 13-Money Measures of the...

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