Money Supply
| Author | Hassan Mohammadi |
| Pages | 519-521 |
Page 519
Money is a collection of liquid assets that is generally accepted as a medium of exchange and for repayment of debt. In that role, it serves to economize on the use of scarce resources devoted to exchange, expands resources for production, facilitates trade, promotes specialization, and contributes to a society's welfare. This theoretical definition serves two purposes: It encompasses new forms of money that may arise as a result of financial innovations related to technological change and institutional developments. It also distinguishes money from other assets by emphasizing its general acceptability as a medium of exchange. While all assets serve as a store of wealth, only a few are accepted as a means of payment for goods and services.
While this definition provides a clear picture of what money is, it does not specify exactly what assets should be included in its measurement. There are several liquid assets such as coins, paper currency, checkable-type deposits, and traveler's checks, which clearly act as a medium of exchange, and definitely belong to its measurement. Several other assets, however, may also serve as a medium of exchange but are not as liquid as currency and checkable-type deposits. For example, money market deposit accounts have check-writing features subject to certain restrictions, and savings accounts can be converted into a medium of exchange with a negligible cost. To what extent such assets should be included in money's measurement is not clear.
As an alternative, economists have proposed defining and measuring money using an empirical approach. This approach emphasizes the role of money as an intermediate target for monetary policy. As Frederic Mishkin pointed out, an effective intermediate target should have three features: It must be measurable, controllable by the central bank, and have a predictable and stable relation with ultimate goals. Thus, an asset should be included in money's measurement if it helps satisfy these requirements. As it appears, evidence on which measure of money has a high predictive power is mixed. A measure that predicts well in one period might not perform well in other times, and a measure that predicts one goal, might not be a good predictor of others.
The Federal Reserve System (also known as the Fed) has incorporated both the theoretical approach and the empirical approach in constructing its measures of the money supply for the United States. The...
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