Money

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ECN 481
Don Dutkowsky
Professor of Economics
Office – 304 Maxwell Hall
Phone -- 443-1918
Roles of Money -Facilitator of Trade


Medium of Exchange -Money is exchanged for
goods and services
Standard of Value -Value is measured in
dollars (the “price tag”)
Other Roles of Money


Standard of Deferred
Payments -- Loans and
financial instruments are
denominated in terms of
money.
Store of Value -- People
can use money when
they wish.
Definitions of Money


M1 = Currency held by the
public + Travelers Checks +
Demand Deposits + Other
Checkable Deposits
M2 = M1 + Savings Deposits
(including MMDAs) + Small
Time Deposits + Retail
Money Market Mutual Funds
Definitions of Money Supply
Components


Currency Held by the Public
-- Paper money held by
consumers and firms.
Travelers Checks – Checks
issued for travelers with
safety features in case they
get lost or stolen.
Demand Deposits and
Checking Privileges

Demand Deposits (DD)-Non-interest bearing
deposits offered by
commercial banks. They
have checkable
privileges with no
restrictions on size of
check or number of
checks per month.
Other Checkable
Deposits

Other Checkable Deposits
(OCD) – Checkable deposits
which are interest earning
(NOW accounts) +
checkable deposits offered
by thrift institutions. They
have no restrictions on size
of check or number of
checks per month.
Checkable Deposits


Checkable Deposits
= DD + OCD
M1 = Currency Held by the
Public + Travelers Checks +
Checkable Deposits
Savings Deposits


Money Market Deposit
Accounts (MMDA) -Checkable deposits with a
limit of maximum number of
checks written per month.
Passbook Savings Deposits
-- No checkable privileges,
but funds can be withdrawn
at any time without penalty.
One More Bank Deposit

Time Deposits (i.e.
Certificates of Deposit)-- A
contract specifying payment
of principal and interest in
an explicit way over a given
interval. Withdrawal before
maturity results in penalty.
Small
(in M2): < $100,000
Large: > $100,000
Types of Banks




Commercial Banks -“full service” banks
Savings and Loans
Savings Banks
Credit Unions
Money Market Mutual
Funds (MMMF)




private institutions (not banks)
pools investor funds
pays interest based upon
overall portfolio
invests in short-term bonds
Retail MMMF (in M2)
 sold
to consumers (as
opposed to institutions)
 offers restricted checkability
Issues -- Defining Money



above definitions, based
on conceptual roles of
money
have the definitions
become less accurate in
capturing roles,
especially with financial
innovation?
declining predictive
ability of money
Alternative Approaches


Empirical Approach -combine components in a
way that best predicts key
macro variables.
Weighted Aggregates -- give
weights to the components
based upon relative liquidity
(e.g. M1 = Currency Held by
the Public
+ 0.98Travelers Checks
+ 0.95DD +0.85OCD)
Using Money Supply in
Monetary Policy



Consult several measures at
once, to track portfolio
changes
(e.g. movement from
MMMF to OCD)
Seasonality
Data Revisions (advance,
actual, or revised)
The Declining Influence
of Money Supply in
Monetary Policy


Federal Reserve pays
considerably less attention
to monetary aggregates than
before
Relies much more heavily
on Federal Funds rate, and
adjusting the target levels.
Two Other
Money Measures


MZM = M2 – (Small Time
Deposits) + (Institutional
MMMF)
M2M = M2 – (Small Time
Deposits)
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