Lecture 5Regulation of money circulation and money supply

Money and Credit

Content

1. Regulation of money circulation.2. Money supply.

2.1. Monetary aggregates as a way of measuring of money supply.

2.2. Peculiarities of construction of money supply indicators in Ukraine.

2.3. Factors that influence on the volume of money supply.

Main definitions:o monetary policyo targetingo inflationo currencyo money supplyo monetary aggregateo monetary baseo …………..

1. Regulation of money circulation

Monetary policy is a set of interrelated, coordinated and aimed to achieve predetermined social and economic objectives measures of money market regulation, which provides state through the central bank of the country.

There are such types of monetary policy by the guide monetary target:monetary targeting regime; currency targeting regime; inflation targeting regime.

• Monetary targeting regime is a set of measures of monetary policy, aimed at supporting a stable demand for money from the society to ensure a predetermined level of the money supply in circulation.

• Currency targeting regime is a set of measures of monetary policy, that provides support for the stability of the exchange rate of certain reserve currency or basket of currencies.

• Inflation targeting is selection of the most real inflation indicator, which can be achieved within a specified time period, using the tools of monetary policy and communication channels.

2. Money supply.2.1. Monetary aggregates as a way of measuring of money supply.

Money supply is a set of money in all forms, which are in an economic turnover for a specified period of time (end of month or year).

The basis for consideration of money supply is so called the portfolio method of analysis of using money.

In a market economy, a person has the ability to store the wealth in various forms, among which money - one of the possible forms.

It is believed that the liquidity of any kind of property (assets), including some cash, is directly related to the cost of exchange for other property. The property with zero costs of exchange is completely liquid.

Money supply

active partwhich is the funds that

actually serve economic circulation

passive partwhich includes cash savings,

account balances, which can be used as a means of settlement

The structure of money supply

On the structural basis the money supply is divided into 4 directions:

by the degree of liquidity

by the form of money

by the allocation in certain of the market

by geographical distribution

Monetary aggregates

The monetary aggregate is a defined by law in accordance with the degree ofliquidity a specific group of liquid assets that can be used as an alternatives indices of money supply.

Monetary aggregates are formed based on the following concepts:

1) money supply in the narrow sense includes not only cash, but also deposit money;

2) the total money supply also includes bank deposits, deposits and securities with fixed income;

3) the total money supply is divided into that which is in circulation, and that which is accumulating, acts as a store of value.

Monetary aggregates in Ukraine:

M0 = cash in circulation outside the depository corporations (banks).M1 = M0 + transferable deposits in national currency (M1-M0).M2 = M1 + transferable deposits in foreign currency and other deposits (M2-M1).M3 = M2 + securities other than shares (M3-M2).

The monetary base

The monetary base is the money that do not participate in the credit turnover and money circulation, but create a base for their expansion. It includes the monetary aggregate M0, cash in banks and reserves of commercial banks on their accounts in the National Bank of Ukraine.

The velocity of money

The velocity of money turnover is a frequency ofmoney transition from one entity to another.

Velocity can be measured by the number of turns in a specific period (usually 1 year) or duration of one turn. Velocity of money characterizes the overall intensity of economic processes.

The main indicators, which characterize the velocity of money, are:

velocity of money in revenues circulation - ratio of gross national product (GNP) or national income to the money supply

rate of money turnover in payments, i.e. the ratio of funds transferred to bank current accounts to the mean value of

money supply.

To analyze the degree of economy`s supply of money the indicator of monetization is used. It is calculated as the ratio of the average value of the money supply to the nominal value of GDP.

Thus, the rate of monetization is the reverse value to the velocity of money. The dollarization ratio is also used; it is measured as the share of foreign exchange in the money supply.

2.2. Peculiarities of construction of money supply indicators in Ukraine.

Period

M3

totalM2

M3–M2total M1 M2–M1total М0 M1–M02002 65 129 64 395 40 354 26 434 13 920 24 041 7342003 95 334 94 603 53 270 33 119 20 151 41 333 7312004 125 705 125 483 67 090 42 345 24 745 58 393 2222005 194 071 193 145 98 573 60 231 38 341 94 573 9252006 261 063 259 413 123 276 74 984 48 292 136 138 1 6502007 396 156 391 273 181 665 111 119 70 546 209 608 4 8842008 515 727 512 527 225 127 154 759 70 369 287 400 3 2002009 487 298 484 772 233 748 157 029 76 719 251 023 2 5262010 597 872 596 841 289 894 182 990 106 904 306 947 1 0312011 685 515 681 801 311 047 192 665 118 382 370 754 3 7142012 773 199 771 126 323 225 203 245 119 980 447 901 2 0722013 908 994 906 236 383 821 237 777 146 044 522 416 2 7582014 956 728 955 349 435 475 282 947 152 528 519 874 1 379

Evolution of money supply in Ukraine

2.3. Factors that have influence on the volume of money supply

There are 2 factors affecting the money supply: The amount of money. The velocity of money.

The amount of money supply is determined by the state - the issuer, its legislature.Meanwhile, the growth of money issue is conditioned by the need commodity circulation and needs of the state (the intensity of their movement in the exercise of functions of treatment and payment).

The velocity of money is influenced by the general economic factors (cyclical development of production, production growth, price movements).

Cash monetary factors: the structure of payments or the ratio of existing to

cashless money,development of credit transactions and cross payments, interest rates on loans on the money market, the introduction of computers to carry out transactions

with credit institutions; the use of electronic money in the calculations.