Money supply growth
Under monetary growth , an increase which is money amount (monetary aggregate M3 understood in Euro space). The central banks of the respective currency areas try to control the money supply with instruments of monetary policy, in particular by setting the base rate or by implementing unconventional measures such as quantitative easing . The central goal here is to guarantee price level stability .
Conceptual classification
In its monetary policy strategy, which was formulated in 1998, the European Central Bank (ECB) assigns a special role to the money supply . This reflects that inflation is ultimately driven by monetary causes in the medium to longer term. Jean-Claude Trichet , former President of the ECB: "There is a long-term relationship between monetary growth and inflation ". The close relationship that exists between money supply and prices, according to a fundamental principle of economics in the medium term, suggests that the analysis of persistent trends in money supply developments is of crucial importance for any central bank aiming to maintain price stability.
Money provider
Central bank
The dominant money provider who provides the economy with base money in the form of the central bank money supply via the commercial banks is the central bank (in Europe this is the ECB ). It also influences the supply of money to the non-banks : financial intermediaries , the state and abroad.
Commercial banks
When granting loans or purchasing assets , commercial banks draw deposit money , which makes up the majority of the money supply in circulation . The increase in the supply of money is therefore largely due to the creation of money by private commercial banks .
Country
The state can influence the money supply by liquidating part of its cash balances or receiving payments from abroad or central bank loans.
Money supply control
The central banks can influence the money supply through two instruments of monetary policy
The main instrument here is the open market operations . This influences the available amount of central bank money, which - with the exception of cash - cannot be used by private households and non-financial companies for transactions, as they do not have any accounts with the central bank. The central bank's purchase of securities therefore increases the amount of central bank money , but has only indirect effects on the money supply . This only increases if securities are bought by non-banks (through banks as intermediaries), or if such an operation causes interest rates to fall and this stimulates the demand for and granting of loans. The connection between central bank money and the money supply is particularly important in times of crisis, e.g. B. in a liquidity trap , only very weak.
An exogenous cause of the increase in the expanded money supply such as M3 can e.g. This happened, for example, as a result of investors switching from government bonds to money market funds - as M3 does not contain any government bonds.
Effects
Due to the increasing creation of money in the credit system, the circulating money supply can grow or shrink depending on the business cycle. Too little money can lead to credit crunch, recession and deflation . A growing amount of money can lead to greater demand for goods . If the capacities to provide an increased supply of goods cannot be created quickly enough, e.g. B. due to a closed output gap or bottlenecks in certain goods markets, the expansion of the money supply leads to price increases in the goods markets, i. H. to inflation.
inflation
Inflation is, on the one hand, an increase in the price of goods and services and, on the other hand, inflation . Inflation occurs when the demand for money increases faster than the amount of (produced) goods ( GDP ).
Modern perspective
In the short term, changes in monetary growth primarily affect production, not inflation. Only in the medium term will there be signs of a connection between money supply growth and inflation. Also important is the fact that the central bank can control the monetary aggregate M3 much less than the monetary aggregate M1 . These effects can also be seen in the fact that M3 growth in the past has often been far from the target announced by the central bank.
Measurement of money supply growth
To measure this growth, the Governing Council has given a growth rate of the money stock M3 as a reference value. This is determined on the basis of medium-term assumptions about the real growth development of GDP and the velocity of M3 . The reference value for money supply growth is intended to be in line with the Governing Council's definition of price level stability and serve to achieve this central objective of the ECB .
Reference value for money supply growth
Is the value for the medium-term growth of the monetary aggregate M3 that the ECB has announced as part of the "second pillar" of its monetary policy strategy. The value is currently (and since the beginning of EMU ) at 4.5% pa
Development of monetary growth
In February 2008, the ECB reported an increase in the M3 money supply of 11.3% over the year. The growth thus remained well above the ECB reference rate of 4.5%. According to the central bank, the strong growth in the money supply carries an upside risk for price developments in the medium to long term.
bibliography
- Oliver Blanchard, Gerhard Illing: Macroeconomics. 3. Edition. Pearson Studium, Munich 2004, ISBN 3-8273-7051-5 .
- Wilfried Fuhrmann: Money and Credit. 2nd Edition. Oldenbourg, Munich 1994, ISBN 3-486-23025-5 .
- Peter Schaal: Monetary Theory and Monetary Policy. 3. Edition. Oldenbourg, Munich 1992, ISBN 3-486-22442-5 .
Individual evidence
- ^ P. Schaal: Monetary Theory and Monetary Policy. 3. Edition. Oldenbourg, p. 95.
- ^ P. Schaal: Monetary Theory and Monetary Policy. 3. Edition. Oldenbourg, p. 97.
- ^ Deutsche Bundesbank: How money is made. April 25, 2017. Retrieved June 11, 2018 .
- ^ P. Schaal: Monetary Theory and Monetary Policy. 3. Edition. Oldenbourg, p. 98.
- ^ Deutsche Bundesbank: How money is made. Retrieved June 11, 2018 .
- ^ Bank of England: Money creation in the modern economy. Retrieved June 11, 2018 .
- ^ Paul De Grauwe: The European Central Bank as a lender of last resort. In: VoxEU.org. August 18, 2011, accessed June 11, 2018 .
- ^ W. Fuhrmann: Money and Credit. 2nd Edition. Oldenbourg, p. 181 ff.
- ↑ O. Blanchard, G. Illing: Macroeconomics. 3. Edition. Pearson Studium, 2004, p. 747.
- ↑ O. Blanchard, G. Illing: Macroeconomics. 3. Edition. Pearson Studium, 2004, pp. 746 ff.