Functions of a Central Bank:

A central bank performs the following functions, as given by De Kock and accepted by the majority of
economists.

1. Regulator of Currency:

The central bank is the bank of issue. It has the monopoly of note issue. Notes issued by it circulate as
legal tender money. It has its issue department which issues notes and coins to commercial banks. Coins
are manufactured in the government mint but they are put into circulation through the central bank.

Central banks have been following different methods of note issue in different countries. The central
bank is required by law to keep a certain amount of gold and foreign securities against the issue of
notes. In some countries, the amount of gold and foreign securities bears a fixed proportion, between
25 to 40 per cent of the total notes issued.

In other countries, a minimum fixed amount of gold and foreign currencies is required to be kept against
note issue by the central bank. This system is operative in India whereby the Reserve Bank of India is
required to keep Rs 115 crores in gold and Rs 85 crores in foreign securities. There is no limit to the issue
of notes after keeping this minimum amount of Rs 200 crores in gold and foreign securities.

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Some of the most The monopoly of issuing notes vested in the central bank ensures uniformity in the
notes issued which helps in facilitating exchange and trade within the country. It brings stability in the
monetary system and creates confidence among the public. The central bank can restrict or expand the
supply of cash according to the requirements of the economy. Thus it provides elasticity to the
monetary system. By having a monopoly of note issue, the central bank also controls the banking system
by being the ultimate source of cash. Last but not the least, by entrusting the monopoly of note issue to
the central bank, the government is able to earn profits from printing notes whose cost is very low as
compared with their face value.

2. Banker, Fiscal Agent and Adviser to theGovernment:

Central banks everywhere act as bankers, fiscal agents and advisers to their respective governments. As
banker to the government, the central bank keeps the deposits of the central and state governments
and makes payments on behalf of governments. But it does not pay interest on governments deposits. It
buys and sells foreign currencies on behalf of the government.

It keeps the stock of gold of the government. Thus it is the custodian of government money and wealth.
As a fiscal agent, the central bank makes short-term loans to the government for a period not exceeding
90 days. It floats loans, pays interest on them, and finally repays them on behalf of the government.
Thus it manages the entire public debt. The central bank also advises the government on such economic
and money matters as controlling inflation or deflation, devaluation or revaluation of the currency,
deficit financing, balance of payments, etc. As pointed out by De Kock, “Central banks everywhere
operate as bankers to the state not only because it may be more convenient and economical to the
state, but also because of the intimate connection between public finance and monetary affairs.”
3. Custodian of Cash Reserves of Commercial Banks:

Commercial banks are required by law to keep reserves equal to a certain percentage of both time and
demand deposits liabilities with the central banks. It is on the basis of these reserves that the central
bank transfers funds from one bank to another to facilitate the clearing of cheques.

Thus the central bank acts as the custodian of the cash reserves of commercial banks and helps in
facilitating their transactions. There are many advantages of keeping the cash reserves of the
commercial banks with the central bank, according to De Kock.

In the first place, the centralisation of cash reserves in the central bank is a source of great strength to
the banking system of a country. Secondly, centralised cash reserves can serve as the basis of a large and
more elastic credit structure than if the same amount were scattered among the individual banks.

Thirdly, centralised cash reserves can be utilised fully and most effectively during periods of seasonal
strains and in financial crises or emergencies. Fourthly, by varying these cash reserves the central bank
can control the credit creation by commercial banks. Lastly, the central bank can provide additional
funds on a temporary and short term basis to commercial banks to overcome their financial difficulties.

4. Custody and Management of Foreign Exchange Reserves:

The central bank keeps and manages the foreign exchange reserves of the country. It is an official
reservoir of gold and foreign currencies. It sells gold at fixed prices to the monetary authorities of other
countries. It also buys and sells foreign currencies at international prices. Further, it fixes the exchange
rates of the domestic currency in terms of foreign currencies.

It holds these rates within narrow limits in keeping with its obligations as a member of the International
Monetary Fund and tries to bring stability in foreign exchange rates. Further, it manages exchange
control operations by supplying foreign currencies to importers and persons visiting foreign countries on
business, studies, etc. in keeping with the rules laid down by the government.

5. Lender of the Last Resort:

De Kock regards this function as a sine qua non of central banking. By granting accommodation in the
form of re-discounts and collateral advances to commercial banks, bill brokers and dealers, or other
financial institutions, the central bank acts as the lender of the last resort.

The central bank lends to such institutions in order to help them in times of stress so as to save the
financial structure of the country from collapse. It acts as lender of the last resort through discount
house on the basis of treasury bills, government securities and bonds at “the front door”.

The other method is to give temporary accommodation to the commercial banks or discount houses
directly through the “back door”. The difference between the two methods is that lending at the front
door is at the bank rate and in the second case at the market rate. Thus the central bank as lender of the
last resort is a big source of cash and also influences prices and market rates.

6. Clearing House for Transfer and Settlement:

As bankers’ bank, the central bank acts as a clearing house for transfer and settlement of mutual claims
of commercial banks. Since the central bank holds reserves of commercial banks, it transfers funds from
one bank to other banks to facilitate clearing of cheques. This is done by making transfer entries in their
accounts on the principle of book-keeping. To transfer and settle claims of one bank upon others, the
central bank operates a separate department in big cities and trade centres. This department is known
as the “clearing house” and it renders the service free to commercial banks.

When the central bank acts as a clearing agency, it is time-saving and convenient for the commercial
banks to settle their claims at one place. It also economises the use of money. “It is not only a means of
economising cash and capital but is also a means of testing at any time the degree of liquidity which the
community is maintaining.”

7. Controller of Credit:

The most important function of the central bank is to control the credit creation power of commercial
bank in order to control inflationary and deflationary pressures within this economy. For this purpose, it
adopts quantitative methods and qualitative methods. Quantitative methods aim at controlling the cost
and quantity of credit by adopting bank rate policy, open market operations, and by variations in reserve
ratios of commercial banks.

Qualitative methods control the use and direction of credit. These involve selective credit controls and
direct action. By adopting such methods, the central bank tries to influence and control credit creation
by commercial banks in order to stabilise economic activity in the country.

Besides the above noted functions, the central banks in a number of developing countries have been
entrusted with the responsibility of developing a strong banking system to meet the expanding
requirements of agriculture, industry, trade and commerce.

Accordingly, the central banks possess some additional powers of supervision and control over the
commercial banks. They are the issuing of licences; the regulation of branch expansion; to see that every
bank maintains the minimum paid up capital and reserves as provided by law; inspecting or auditing the
accounts of banks; to approve the appointment of chairmen and directors of such banks in accordance
with the rules and qualifications; to control and recommend merger of weak banks in order to avoid
their failures and to protect the interest of depositors; to recommend nationalisation of certain banks to
the government in public interest; to publish periodical reports relating to different aspects of monetary
and economic policies for the benefit of banks and the public; and to engage in research and train
banking personnel etc..

To Hawtrey, a central bank is that which the lender of the last resort is. According to A.C.L. Day, a central
bank is “to help control and stabilise the monetary and banking system.”

According to Sayers, the central bank “is the organ of government that undertakes the major financial
operations of the government and by its conduct of these operations and by other means, influences
the behaviour of financial institutions so as to support the economic policy of the Government.” Sayers
refers only to the nature of the central bank as the government’s bank. All these definitions are narrow
because they refer only to one particular function of a central bank.

On the other hand, Samuelson’s definition is wide. According to him, a central bank “is a bank of
bankers. Its duty is to control the monetary base…. and through control of this ‘high-powered money’ to
control the community’s supply of money.” But the broadest definition has been given by De Kock.
In his words, a central bank is “a bank which constitutes the apex of the monetary and banking structure
of its country and which performs as best as it can in the national economic interest, the following
functions: (i) The regulation of currency in accordance with the requirements of business and the
general public for which purpose it is granted either the sole right of note issue or at least a partial
monopoly thereof, (ii) The performance of general banking and agency for the state, (iii) The custody of
the cash reserves of the commercial banks, (iv) The custody and management of the nation’s reserves of
international currency, (v) The granting of accommodation in the form of re-discounts and collateral
advances to commercial banks, bill brokers and dealers, or other financial institutions and the general
acceptance of the responsibility of lender of the last resort, (vi) The settlement of clearance balances
between the banks, (vii) The control of credit in accordance with the needs of business and with a view
to carrying out the broad monetary policy adopted by the state.” De Kock’s definition is too long to be
called a definition. For, a definition must be brief.

Functions of a Central Bank:

A central bank performs the following functions, as given by De Kock and accepted by the majority of
economists.

1. Regulator of Currency:

The central bank is the bank of issue. It has the monopoly of note issue. Notes issued by it circulate as
legal tender money. It has its issue department which issues notes and coins to commercial banks. Coins
are manufactured in the government mint but they are put into circulation through the central bank.

Central banks have been following different methods of note issue in different countries. The central
bank is required by law to keep a certain amount of gold and foreign securities against the issue of
notes. In some countries, the amount of gold and foreign securities bears a fixed proportion, between
25 to 40 per cent of the total notes issued.

In other countries, a minimum fixed amount of gold and foreign currencies is required to be kept against
note issue by the central bank. This system is operative in India whereby the Reserve Bank of India is
required to keep Rs 115 crores in gold and Rs 85 crores in foreign securities. There is no limit to the issue
of notes after keeping this minimum amount of Rs 200 crores in gold and foreign securities.
What is 'Fiscal Policy'
Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and
influence a nation's economy. It is the sister strategy to monetary policy through which a central bank
influences a nation's money

Government spending policies that influence macroeconomic conditions. Through fiscal policy,
regulators attempt to improve unemployment rates, control inflation, stabilize business cycles and
influence interest rates in an effort to control the economy. Fiscal policy is largely based on the ideas of
British economist John Maynard Keynes (1883–1946), who believed governments could change
economic performance by adjusting tax rates and government spending.

Read more: Fiscal Policy Definition | Investopedia

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Fiscal policy is important because it regulates government spending and taxation. Fiscal policy controls
decisions made at the local, national and federal government levels, such as goods, services and
products purchased, appropriate levels of taxation and government financial programs.

The two major examples of expansionary fiscal policy are tax cuts and increased government spending.
Both of these policies increase aggregate demand while contributing to deficits or drawing down of
budget surpluses.

The two major examples of expansionary fiscal policy are tax cuts and increased government spending.
Both of these policies increase aggregate demand while contributing to deficits or drawing down of
budget surpluses. They are typically employed during recessions or amid fears of one.

Classical macroeconomics considers fiscal policy to be an effective strategy for the government to
counterbalance the natural depression in spending and economic activity that takes place during a
recession. As business conditions deteriorate, consumers and businesses cut back on spending and
investments.

This rational response on an individual level can exacerbate the situation for the broader economy. The
reduction in spending and economic activity leads to less revenue for businesses, which leads to greater
unemployment and even less spending and economic activity. During the Great Depression, John
Maynard Keynes was the first to identify this self-reinforcing negative cycle in his "General Theory of
Employment, Interest, and Money" and identified fiscal policy as a way to smooth out and prevent these
tendencies of the business cycle.

The government attempts to bridge the reduction in demand by giving a windfall to citizens via a tax cut
or an increase in government spending, which creates jobs and alleviates unemployment. An example of
such an effort is the Economic Stimulus Act of 2008, in which the government attempted to boost the
economy by sending taxpayers $600 or $1,200 depending on their marital status and number of
dependents. The total cost was $152 billion. Tax cuts are favored by conservatives for effective
expansionary fiscal policy, as they have less faith in the governments and more faith in markets.

Liberals tend to be more confident in the ability of the government to spend judiciously and are more
inclined towards government spending as a means of expansionary fiscal policy. An example of
government spending as expansionary fiscal policy is the American Recovery and Reinvestment Act of
2009. This effort was taken on in the midst of the Great Recession and totaled $831 billion. Most of this
spending targeted infrastructure, education and extension of unemployment

BREAKING DOWN 'Fiscal Policy'

To illustrate how the government could try to use fiscal policy to affect the economy, consider an
economy that’s experiencing a recession. The government might lower tax rates to try to fuel economic
growth. If people are paying less in taxes, they have more money to spend or invest. Increased
consumer spending or investment could improve economic growth. Regulators don’t want to see too
great of a spending increase though, as this could increase inflation.

Another possibility is that the government might decide to increase its own spending – say, by building
more highways. The idea is that the additional government spending creates jobs and lowers the
unemployment rate. Some economists, however, dispute the notion that governments can create jobs,
because government obtains all of its money from taxation – in other words, from the productive
activities of the private sector.

One of the many problems with fiscal policy is that it tends to affect particular groups
disproportionately. A tax decrease might not be applied to taxpayers at all income levels, or some
groups might see larger decreases than others. Likewise, an increase in government spending will have
the biggest influence on the group that is receiving that spending, which in the case of highway spending
would be construction workers.

Fiscal policy and monetary policy are two major drivers of a nation’s economic performance. Through
monetary policy, a country’s central bank influences the money supply. Regulators use both policies to
try to boost a flagging economy, maintain a strong economy or cool off an overheated economy.

For more on fiscal policy, read What is Fiscal Policy?

BREAKING DOWN 'Fiscal Policy'

To illustrate how the government could try to use fiscal policy to affect the economy, consider an
economy that’s experiencing a recession. The government might lower tax rates to try to fuel economic
growth. If people are paying less in taxes, they have more money to spend or invest. Increased
consumer spending or investment could improve economic growth. Regulators don’t want to see too
great of a spending increase though, as this could increase inflation.

Another possibility is that the government might decide to increase its own spending – say, by building
more highways. The idea is that the additional government spending creates jobs and lowers the
unemployment rate. Some economists, however, dispute the notion that governments can create jobs,
because government obtains all of its money from taxation – in other words, from the productive
activities of the private sector.

One of the many problems with fiscal policy is that it tends to affect particular groups
disproportionately. A tax decrease might not be applied to taxpayers at all income levels, or some
groups might see larger decreases than others. Likewise, an increase in government spending will have
the biggest influence on the group that is receiving that spending, which in the case of highway spending
would be construction workers.
Fiscal policy and monetary policy are two major drivers of a nation’s economic performance. Through
monetary policy, a country’s central bank influences the money supply. Regulators use both policies to
try to boost a flagging economy, maintain a strong economy or cool off an overheated economy.

BREAKING DOWN 'Fiscal Policy'

To illustrate how the government could try to use fiscal policy to affect the economy, consider an
economy that’s experiencing a recession. The government might lower tax rates to try to fuel economic
growth. If people are paying less in taxes, they have more money to spend or invest. Increased
consumer spending or investment could improve economic growth. Regulators don’t want to see too
great of a spending increase though, as this could increase inflation.

Another possibility is that the government might decide to increase its own spending – say, by building
more highways. The idea is that the additional government spending creates jobs and lowers the
unemployment rate. Some economists, however, dispute the notion that governments can create jobs,
because government obtains all of its money from taxation – in other words, from the productive
activities of the private sector.

One of the many problems with fiscal policy is that it tends to affect particular groups
disproportionately. A tax decrease might not be applied to taxpayers at all income levels, or some
groups might see larger decreases than others. Likewise, an increase in government spending will have
the biggest influence on the group that is receiving that spending, which in the case of highway spending
would be construction workers.

Fiscal policy and monetary policy are two major drivers of a nation’s economic performance. Through
monetary policy, a country’s central bank influences the money supply. Regulators use both policies to
try to boost a flagging economy, maintain a strong economy or cool off an overheated economy.
Readers Question explain the terms monetary policy and fiscal policy
and compare the ways in which they influence the UK economy.

Monetary Policy

•Monetary policy involves influencing the supply and demand for money through interest rates and
other monetary tools.

•Monetary policy is usually conducted by the Central Bank, e.g. UK – Bank of England, US – Federal
Reserve.

•The target of monetary policy is to achieve low inflation (and usually promote economic growth)

•The main tool of monetary policy is changing interest rates. For example, if the Central Bank feel the
economy is growing too quickly and inflation is increasing, then they will increase interest rates to
reduce demand in the economy.

•In some circumstances, Central Banks may use other tools than just interest rates. For example, in the
great recession 2008-12, Central Banks in UK and US pursued quantitative easing. This involved
increasing the money supply to increase demand.

Fiscal Policy

•Fiscal policy relates to the impact of government spending and tax on aggregate demand and the
economy.

•Expansionary fiscal policy is an attempt to increase aggregate demand and will involve higher
government spending and lower taxes. This expansionary fiscal policy will lead to a larger budget deficit.

•Deflationary fiscal policy is an attempt to reduce aggregate demand and will involve lower spending
and higher taxes. This deflationary fiscal policy will help reduce a budget deficit.

Main Difference between Fiscal and Monetary

Policy
The main difference is that monetary policy uses interest rates set by the Central Bank. Fiscal policy
involves changing government spending and taxes to influence the level of aggregate demand.

Similarities between Fiscal and Monetary Policy

Both aim at creating a more stable economy characterised by low inflation and positive economic
growth. Both fiscal and monetary policy are an attempt to reduce economic fluctuations and smooth
out the economic cycle.

Prudential Regulation Authority

Page Content

The Prudential Regulation Authority (PRA) was created as a part of the Bank of England by the Financial
Services Act (2012) and is responsible for the prudential regulation and supervision of around 1,700
banks, building societies, credit unions, insurers and major investment firms. The PRA’s objectives are
set out in the Financial Services and Markets Act 2000 (FSMA). The PRA has three statutory objectives:

1. A general objective to promote the safety and soundness of the firms it regulates;

2. An objective specific to insurance firms, to contribute to the securing of an appropriate degree of

protection for those who are or may become insurance policyholders; and

3. A secondary objective to facilitate effective competition.

Definition of M0, M1, M2, M3, M4. Different measures of money supply. ... M0 and M1, also called
narrow money, normally include coins and notes in circulation and other moneyequivalents that are
easily convertible into cash. M2includes M1 plus short-term time deposits in banks and 24-hourmoney
market funds.
Macro prudential regulation

The term macro prudential regulation characterizes the approach to financial regulation aimed to
mitigate the risk of the financial system as a whole (or "systemic risk"). In the aftermath of thelate-
2000s financial crisis, there is a growing consensus among policymakers and economic researchers
about the need to re-orient the regulatory framework towards a macro prudential perspective.

Macro prudential regulation

The term macroprudential regulationcharacterizes the approach to financial regulation aimed to

mitigate the risk of the financial system as a whole (or "systemic risk"). In the aftermath of thelate-
2000s financial crisis, there is a growing consensus among policymakers and economic researchers
about the need to re-orient the regulatory framework towards a macroprudential perspective.

HistoryEdit

As documented by Clement (2010), the term "macroprudential" was first used in the late 1970s in
unpublished documents of the Cooke Committee (the precursor of the Basel Committee on Banking
Supervision) and the Bank of England.[1] But only in the early 2000s—after two decades of
recurrentfinancial crises in industrial and, most often, emerging market countries[2]—did the
macroprudential approach to the regulatory and supervisory framework become increasingly
promoted, especially by authorities of the Bank for International Settlements. A wider agreement on
its relevance has been reached as a result of the late-2000s financial crisis.

Objectives and justificationEdit

The main goal of macroprudential regulation is to reduce the risk and the macroeconomic costs of
financial instability. It is recognized as a necessary ingredient to fill the gap between macroeconomic
policy and the traditional microprudential regulation of financial institutions (Bank of England,
2009).[3]
Macroprudential vs microprudential regulationEdit

Following Borio (2003), the macro- and microprudential perspectives differ in terms of their objectives
and understanding on the nature of risk.[4]Traditional microprudential regulation seeks to enhance
the safety and soundness of individual financial institutions, as opposed to the macroprudential view
which focuses on welfare of the financial system as a whole. Further, risk is taken as exogenous under
the microprudential perspective, in the sense of assuming that any potential shock triggering a
financial crisis has its origin beyond the behavior of the financial system. The macroprudential
approach, on the other hand, recognizes that risk factors may configure endogenously, i.e., as a
systemic phenomenon. In line with this reasoning, macroprudential policy addresses the
interconnectedness of individual financial institutions and markets, as well as their common exposure
to economic risk factors. It also focuses on the procyclical behavior of the financial system in the effort
to foster its stability.

What is meant by money growth?

Money supply is the entire stock of currency and other liquid instruments circulating in a country's
economy as of a particular time.
What is included in m1 and m2?

M2 is a measure of the money supply that includes all elements of M1 as well as "near money." M1
includes cash and checking deposits, while near money refers to savings deposits, money market
securities, mutual funds and other time deposits.

What is the m3?

M3 is a measure of the money supply that includes M2 as well as large time deposits, institutional
money market funds, short-term repurchase agreements and other larger liquid assets.
What is meant by money supply?

The money supply measures the total amount of money in the economy at a particular time. It
includes actual notes and coins and also any deposits which can be quickly converted into cash.
Narrow Money. e.g. M0 = This is the level of notes and coins in circulation + banks operational
balances at the Bank of England.

What is 'M3'

M3 is a measure of the money supply that includes M2 as well as large time deposits, institutional
money market funds, short-term repurchase agreements and other larger liquid assets. The M3
measurement includes assets that are less liquid than other components of the money supply and are
referred to as "near, near money," which are more closely related to the finances of larger financial
institutions and corporations than to those of small businesses and individuals.

BREAKING DOWN 'M3'

The money supply, sometimes referred to the money stock, has many different classifications with
respect to liquidity, and M3 is just one of them. The total money supply includes all of the currency in
circulation as well as liquid financial products, such as certificates of deposit (CDs). The M3
classification is the broadest measure of an economy's money supply. It emphasizes money as a store-
of-value more so than money as a medium of exchange — hence the inclusion of less-liquid assets in
M3. It is used by economists to estimate the entire money supply within an economy, and by
governments to direct policy and control inflation over medium and long-term periods.

M3 can be thought of as a congregation of all the other classifications of money (M0, M1 and M2) plus
all of the less liquid components of the money supply. M0 refers to the currency in circulation, such as
coins and cash. M1 includes M0 plus demand deposits such as checking accounts as well as traveler's
checks; M1 includes the currency that is out of circulation but is readily available. M2 includes all of
M1 (and all of M0 as a result) plus savings deposits and certificates of deposit, which are less liquid
than checking accounts. M3 includes all of M2 (and all of M1 and M0 as a result) but also adds the
least liquid components of the money supply that are not in circulation, such as repurchase
agreements that do not mature for days or weeks.

Calculating M3
Each M3 component is given equal weight during calculation. This means, for example, that M2 and
large time deposits are treated the same and aggregated without any adjustments. While this does
create a simplified calculation, it assumes that each component of M3 affects the economy the same
way. This can be considered a shortcoming of this measurement of the money supply.

M3's Importance to the Federal Reserve

Since 2006, M3 is no longer tracked by the U.S. central bank, the Federal Reserve (Fed). The Fed had
not used M3 in its monetary policy decisions even before 2006. The additional less liquid components
of M3 did not seem to convey more economic information than was already captured by the more
liquid components of M2.

What is the money supply? Is it important?

The money supply is commonly defined to be a group of safe assets that households and businesses
can use to make payments or to hold as short-term investments. For example, U.S. currency and
balances held in checking accounts and savings accounts are included in many measures of the money
supply.

There are several standard measures of the money supply, including the monetary base, M1, and M2.
The monetary base is defined as the sum of currency in circulation and reserve balances (deposits held
by banks and other depository institutions in their accounts at the Federal Reserve). M1 is defined as
the sum of currency held by the public and transaction deposits at depository institutions (which are
financial institutions that obtain their funds mainly through deposits from the public, such as
commercial banks, savings and loan associations, savings banks, and credit unions). M2 is defined as
M1 plus savings deposits, small-denomination time deposits (those issued in amounts of less than
$100,000), and retail money market mutual fund shares. Data on monetary aggregates are reported in
the Federal Reserve's H.3 statistical release ("Aggregate Reserves of Depository Institutions and the
Monetary Base") and H.6 statistical release ("Money Stock Measures").

Over some periods, measures of the money supply have exhibited fairly close relationships with
important economic variables such as nominal gross domestic product (GDP) and the price level.
Based partly on these relationships, some economists--Milton Friedman being the most famous
example--have argued that the money supply provides important information about the near-term
course for the economy and determines the level of prices and inflation in the long run. Central banks,
including the Federal Reserve, have at times used measures of the money supply as an important
guide in the conduct of monetary policy.
Over recent decades, however, the relationships between various measures of the money supply and
variables such as GDP growth and inflation in the United States have been quite unstable. As a result,
the importance of the money supply as a guide for the conduct of monetary policy in the United
States has diminished over time. The Federal Open Market Committee, the monetary policymaking
body of the Federal Reserve System, still regularly reviews money supply data in conducting monetary
policy, but money supply figures are just part of a wide array of financial and economic data that
policymakers review.

Money supply M1, M2, M3

Release Date: Usually released weekly, every Thursday

Release Time: At 4.30pm US Eastern Time

Released By: The US Federal Reserve bank

The Money Supply refers to the entire stock of currency and other liquid instruments in a country’s
economy as of a particular time. The money supply includes notes, coins and balances that are kept in
savings and checking accounts. There are various types of money supply and these are labeled as M0,
M1, M2 and M3, according to the type and size of the account in which the instrument is kept. In the
UK, there is also the M4 money supply classification. Different countries may use different
classifications.

M1 is a measure of the money supply that includes all physical money, such as coins and notes,
demand deposits, checking accounts and Negotiable Order of Withdrawal (NOW) accounts. In other
words, M1 measures the most liquid components of the money supply. It contains money and assets
that can quickly be converted to cash. M1 purely focuses on the role of money as a medium of
exchange. The advent of ATMs and debit cards have meant that bank checking accounts can now be
considered as M1 since it is easy to pull out spendable, liquid currency from them using ATMs and
debit cards. M1 is used to quantify the amount of money in circulation. M1 does not include “near
money”.

M2 is a measure of money supply that includes all the elements of as well as “near money”. “Near
money” refers to savings deposits and other money market instruments such as fixed deposits which
are less liquid. They can easily be converted to cash but are not as suitable as mediums of exchange
mediums due to their less liquid nature. M2 is a broader money classification than M1. A consumer or
business don’t pay for, or receive savings deposits during exchange of goods and services, but could
convert M2 components to cash in a short time. M2 is important because modern economies use cash
transfers between different types of accounts. For example, a business may transfer $10,000 from a
money market account to its checking account. M1 and M2 are inter-related because a cash transfer
can occur between accounts (M2), and this transfer can be cashed by the recipient in liquid form (M1).

M3 is a measure of money supply that includes all elements of M2 as well as large time deposits,
institutional money market funds, and other larger liquid assets. The M3 measurement includes
assets that are considerably less liquid than other components of the money supply. They tend to lean
towards assets associated more with larger financial institutions and corporations than to the smaller
business units and individuals. Such assets are known as “near, near money.” The M3 classification is
therefore the broadest measure of an economy’s money supply, emphasizing the role of money more
as a store of value and investment rather than as a medium of exchange. Thus a typical Money Supply
report will encompass all aspects of M1, M2 and M3.

Time of Release

The Money Supply report is usually released weekly at 4.30pm US Eastern Time, every Thursday. The
data is released on the website of the US Federal Reserve bank, and also on independent news feeds
from Bloomberg and Thomas Reuters.

Interpreting the Data

The money supply is closely monitored by economists and central banks develop policies around it.
Money supply data is collected, recorded and published by the central bank, who develop policies of
increasing or decrease the supply of money so as to curb inflation or deflation. Money supply will also
affect price level, inflation and the business cycle. Money supply is positively correlated with interest
rates. An increase in the supply of money typically lowers interest rates, which in turns generates
more investment and puts more money in the hands of consumers, thereby stimulating spending. This
is a policy of quantitative easing already being used in the US, UK and a few other countries to
stimulate their economies.

Businesses respond by increasing production when money supply (especially M3) increases. The
increased business activity raises the demand for labor and pushes up employment.

Conclusion

Even though money supply is a low market impact event which is not directly tradable, it can be used
as an indicator to predict policy direction of central banks.

Sent from my iPhone

What is 'Money Supply'

Money supply is the entire stock of currency and other liquid instruments circulating in a country's
economy as of a particular time. Also referred to as money stock, money supply includes safe assets,
such as cash, coins, and balances held in checking and savings accounts that businesses and
individuals can use to make payments or hold as short-term investments.

Read more: Money Supply Definition | Investopedia

http://www.investopedia.com/terms/m/moneysupply.asp#ixzz4abRx2ewo

Follow us: Investopedia on Facebook

BREAKING DOWN 'Money Supply'

Economists analyze the money supply and develop policies revolving around it through controlling
interest rates and increasing or decreasing the amount of money flowing in the economy. Money
supply data is collected, recorded and published periodically, typically by the country's government or
central bank. Public and private sector analysis is performed because of the money supply's possible
impacts on price level, inflation and the business cycle. In the United States, the Federal Reserve
policy is the most important deciding factor in the money supply.

How Money Supply is Measured

The various types of money in the money supply are generally classified as Ms, such as M0, M1, M2
and M3, according to the type and size of the account in which the instrument is kept. Not all of the
classifications are widely used, and each country may use different classifications. M0 and M1, for
example, are also called narrow money and include coins and notes that are in circulation and other
money equivalents that can be converted easily to cash. M2 includes M1 and, in addition, short-term
time deposits in banks and certain money market funds. M3 includes M2 in addition to long-term
deposits. However, it is no longer included in the reporting by the Federal Reserve. MZM, or money
zero maturity, is a measure that includes financial assets with zero maturity and that are immediately
redeemable at par. The Federal Reserve relies heavily on MZM data because its velocity is a proven
indicator of inflation.

The Effect of Money Supply on the Economy

An increase in the supply of money typically lowers interest rates, which in turns generates more
investment and puts more money in the hands of consumers, thereby stimulating spending.
Businesses respond by ordering more raw materials and increasing production. The increased
business activity raises the demand for labor. The opposite can occur if the money supply falls or
when its growth rate decline.

Historically, the measure of money supply has shown that relationships exist between certain
economic factors and inflation, which was used as a determinant of the future direction of price levels
and inflation. However, since 2000, these relationships have become unstable, reducing their
reliability as a guide for monetary policy. Although money supply measures are still widely used, they
are no more important than the wide array of economic data that economists and the Federal Reserve
collects and review.
Money supply M1, M2, M3
The Money Supply refers to the entire stock of currency and other liquid instruments in a country’s
economy as of a particular time. The money supply includes notes, coins and balances that are kept in
savings and checking accounts. There are various types of money supply and these are labeled as M0,
M1, M2 and M3, according to the type and size of the account in which the instrument is kept. In the
UK, there is also the M4 money supply classification. Different countries may use different
classifications.

M1 is a measure of the money supply that includes all physical money, such as coins and notes,
demand deposits, checking accounts and Negotiable Order of Withdrawal (NOW) accounts. In other
words, M1 measures the most liquid components of the money supply. It contains money and assets
that can quickly be converted to cash. M1 purely focuses on the role of money as a medium of
exchange. The advent of ATMs and debit cards have meant that bank checking accounts can now be
considered as M1 since it is easy to pull out spendable, liquid currency from them using ATMs and
debit cards. M1 is used to quantify the amount of money in circulation. M1 does not include “near
money”.

M2 is a measure of money supply that includes all the elements of as well as “near money”. “Near
money” refers to savings deposits and other money market instruments such as fixed deposits which
are less liquid. They can easily be converted to cash but are not as suitable as mediums of exchange
mediums due to their less liquid nature. M2 is a broader money classification than M1. A consumer or
business don’t pay for, or receive savings deposits during exchange of goods and services, but could
convert M2 components to cash in a short time. M2 is important because modern economies use cash
transfers between different types of accounts. For example, a business may transfer $10,000 from a
money market account to its checking account. M1 and M2 are inter-related because a cash transfer
can occur between accounts (M2), and this transfer can be cashed by the recipient in liquid form (M1).

M3 is a measure of money supply that includes all elements of M2 as well as large time deposits,
institutional money market funds, and other larger liquid assets. The M3 measurement includes
assets that are considerably less liquid than other components of the money supply. They tend to lean
towards assets associated more with larger financial institutions and corporations than to the smaller
business units and individuals. Such assets are known as “near, near money.” The M3 classification is
therefore the broadest measure of an economy’s money supply, emphasizing the role of money more
as a store of value and investment rather than as a medium of exchange. Thus a typical Money Supply
report will encompass all aspects of M1, M2 and M3.

Time of Release

The Money Supply report is usually released weekly at 4.30pm US Eastern Time, every Thursday. The
data is released on the website of the US Federal Reserve bank, and also on independent news feeds
from Bloomberg and Thomas Reuters.

Interpreting the Data

The money supply is closely monitored by economists and central banks develop policies around it.
Money supply data is collected, recorded and published by the central bank, who develop policies of
increasing or decrease the supply of money so as to curb inflation or deflation. Money supply will also
affect price level, inflation and the business cycle. Money supply is positively correlated with interest
rates. An increase in the supply of money typically lowers interest rates, which in turns generates
more investment and puts more money in the hands of consumers, thereby stimulating spending. This
is a policy of quantitative easing already being used in the US, UK and a few other countries to
stimulate their economies.

Businesses respond by increasing production when money supply (especially M3) increases. The
increased business activity raises the demand for labor and pushes up employment.

Conclusion

Even though money supply is a low market impact event which is not directly tradable, it can be used
as an indicator to predict policy direction of central banks.

Sent from my iPhone

What is 'Money Supply'

Money supply is the entire stock of currency and other liquid instruments circulating in a country's
economy as of a particular time. Also referred to as money stock, money supply includes safe assets,
such as cash, coins, and balances held in checking and savings accounts that businesses and
individuals can use to make payments or hold as short-term investments.
Read more: Money Supply Definition | Investopedia
http://www.investopedia.com/terms/m/moneysupply.asp#ixzz4abRx2ewo

Follow us: Investopedia on Facebook

BREAKING DOWN 'Money Supply'

Economists analyze the money supply and develop policies revolving around it through controlling
interest rates and increasing or decreasing the amount of money flowing in the economy. Money
supply data is collected, recorded and published periodically, typically by the country's government or
central bank. Public and private sector analysis is performed because of the money supply's possible
impacts on price level, inflation and the business cycle. In the United States, the Federal Reserve
policy is the most important deciding factor in the money supply.

How Money Supply is Measured

The various types of money in the money supply are generally classified as Ms, such as M0, M1, M2
and M3, according to the type and size of the account in which the instrument is kept. Not all of the
classifications are widely used, and each country may use different classifications. M0 and M1, for
example, are also called narrow money and include coins and notes that are in circulation and other
money equivalents that can be converted easily to cash. M2 includes M1 and, in addition, short-term
time deposits in banks and certain money market funds. M3 includes M2 in addition to long-term
deposits. However, it is no longer included in the reporting by the Federal Reserve. MZM, or money
zero maturity, is a measure that includes financial assets with zero maturity and that are immediately
redeemable at par. The Federal Reserve relies heavily on MZM data because its velocity is a proven
indicator of inflation.
The Effect of Money Supply on the Economy

An increase in the supply of money typically lowers interest rates, which in turns generates more
investment and puts more money in the hands of consumers, thereby stimulating spending.
Businesses respond by ordering more raw materials and increasing production. The increased
business activity raises the demand for labor. The opposite can occur if the money supply falls or
when its growth rate decline.

Historically, the measure of money supply has shown that relationships exist between certain
economic factors and inflation, which was used as a determinant of the future direction of price levels
and inflation. However, since 2000, these relationships have become unstable, reducing their
reliability as a guide for monetary policy. Although money supply measures are still widely used, they
are no more important than the wide array of economic data that economists and the Federal Reserve
collects and reviews.