Money∗
Luc Hens
September 11, 2014
How the quantity of money is measured
Table 1 shows the components of money in the euro area. This table complements Mankiw (2013, table 4-1 p. 84), which shows the measures of money in
the United States.
plus:
is:
Table 1: The measures of money in the euro area (end-2013)
C
currency in circulation
€ 909.6 billion
D
deposits (*)
€ 4 481.5 billion
M1 money supply
€ 5 391.1 billion
plus:
deposits on saving accounts (**)
€ 3 812.4 billion
is:
M2 a wider measure of money supply
€ 9 203.5 billion
Note. Data from European Central Bank (2014, 2014/09 (September), table 2.3).
(*) “Overnight deposits”: item (2) in table 2.3.2.
C + D = M1; cf M1 in table 2.3.1.
(**) The sum of items (3) and (4) in table 2.3.2.
C + D + deposits on saving accounts = M2; cf. M2 in table 2.3.1.
Assignment. Download the September 2014 Monthly Bulletin from the ECB
web site (www.ecb.europa.eu > Publications > Monthly Bulletin). Locate
table 2.3 and verify whether you can find the numbers reported in the table
above. Make a similar breakdown of the money supply for the end of 2012.
The money multiplier
We found that the money multiplier (m) is
m=
cr + 1
cr + rr
where
rr =
∗ Handout
R
D
and
for Chapter 4 in Mankiw (2013).
1
cr =
C
D
Currency in circulation (C) and deposits (D) are listed in table 1. Reserves
(R) are reported as “Credit institutions’ current accounts” in European Central
Bank (2014, table 1.4.2 p. S9, Reserve maintenance). End-2013 the reserves of
banks in the euro area amounted to 220.2 billion euros. This implies that the
reserve ratio (rr) in the euro area (end-2012) is:
rr =
R
220.2 billion euros
=
≈ 0.05
D
4481.5 billion euros
The currency-to-deposits ratio (cr) in the euro area (end-2012) is:
cr =
909.6 billion euros
C
=
≈ 0.20
D
4481.5 billion euros
Hence the money multiplier in the euro area is
m=
cr + 1
0.20 + 1
≈
≈ 4.8
cr + rr
0.20 + 0.05
Instruments of monetary policy
Open market operations. The European Central Bank didn’t use open market
operations in the traditional sense before 2009. Since mid-2009 however, the
European Central Bank has purchased (and at times sold) government bonds
to influence the money supply. These purchases and sales of government bonds
by the central bank work just like open market transactions in our textbook
model of the money multiplier. The ECB’s holdings of such securities appear in
the ECB balance sheet as “securities held for monetary policy purposes” (see a
recent issue of European Central Bank (2014, Monetary Policy Statistics: table
1.1)). Figure 1 shows the ECB’s holdings of securities held for monetary policy
purposes. Note the sharp increase in the ECB’s holdings of securities in the
second half of 2011: this represents purchases by the ECB of government bonds
and hence causes the money supply to increase.
Assignment. Download the September 2014 Monthly Bulletin from the
ECB web site (www.ecb.europa.eu > Publications > Monthly Bulletin). Locate table 1.1 and find the line “securities held for monetary policy purposes”.
Verify whether the numbers match figure 1. Did the ECB’s bond holdings go
up or down in the weeks covered by the table? Does that imply an increase or
a decrease of the money supply?
Policy rate. The main policy rate of the European Central Bank is the
“interest rate on main refinancing operations”, or refi rate. The refi rate is
reported in European Central Bank (2014, table 1.2) and on the web site of
the European Central Bank (www.ecb.europa.eu; follow the link > Past key
ECB interest rates). Figure 2 shows the refi rate since 1999. If the European
Central Bank changes the refi rate, it does this by multiples of one-quarter of a
percentage point (25 basis points).
Minimum reserve requirements. The European Central Bank changed the
minimum reserve requirements only once (from 2% to 1% in January 2012). The
central banks of (among other countries) China and India change the minimum
reserve requirements frequently as a tool of monetary policy. Figure 3 shows the
2
250
Billions of euro
200
150
100
50
0
2009
2010
2011
2012
2013
2014
2015
Figure 1: Government bonds held by the European Central Bank for monetary
policy purposes. Note. Data from European Central Bank (2014, Monetary
Policy Statistics: table 1.1), various issues.
5
4
Percent
3
2
1
0
1999
2001
2003
2005
2007
2009
2011
2013
2015
Figure 2: Refi rate of the European Central Bank, 1999–2014. Note. Data from
European Central Bank (2014, table 1.2), various issues.
3
22
21
Percent
20
19
18
17
16
15
2009
2010
2011
2012
2013
2014
2015
Figure 3: Minimum reserve ratio required from large banks by the central bank
of China. Note. Data from People’s Bank of China (2014) and previous issues.
minimum reserve reserve ratio required from large banks by the central bank of
China.
References
European Central Bank (2014). Monthly Bulletin. European Central Bank,
Frankfurt.
Mankiw, N. G. (2013). Macroeconomics. Worth/Palgrave MacMillan, Basingstoke, 8th edition.
People’s Bank of China (2014). Highlights of China’s Monetary Policy
in the Second Quarter of 2014. Retrieved on 11 September 2014 from
http://www.pbc.gov.cn/publish/english/955/index.html.
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