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Complex Economic Metrics Linking to Scaling Money Supply

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Scientific Metrics: Towards Analytical and Quantitative Sciences

Part of the book series: Understanding Complex Systems ((UCS))

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Abstract

It is concluded that there is a simple solution for scaling money supply, with using complex economic metrics.

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Notes

  1. 1.

    Different countries adopt different types of Ms. In Eurozone, the European Central Bank’s definition of euro area monetary aggregates: \(M_1\) as currency in circulation + overnight deposits, \(M_2\) = \(M_1\) + deposits with an agreed maturity up to 2 years + deposits redeemable at a period of notice up to 3 months. And \(M_3\) = \(M_2\) + repurchase agreements + money market fund (MMF) shares/units + debt securities up to 2 years. However, there are just two official UK measures. \(M_0\) is referred to the “wide monetary base” or “narrow money” and \(M_4\) is referred to “broad money” or simply “the money supply”. \(M_0\) = cash outside Bank of England + banks’ operational deposits with Bank of England. \(M_4\) = cash outside banks (i.e., in circulation with the public and non-bank firms) + private-sector retail bank and building society deposits + private-sector wholesale bank and building society deposits and certificates of deposit. In the UK, \(M_0\) includes bank reserves, so \(M_0\) is referred to the monetary base, or narrow money. \(M_1\) is referred to bank reserves. \(M_2\) is a broader classification of money than \(M_1\) and is a key economic indicator used to forecast inflation. And \(M_3\) is \(M_2\) plus large and long-term deposits. Meanwhile, MB is referred to the monetary base or total currency and MZM is money with zero maturity, which measures the supply of financial assets redeemable at par on demand. The ratio of a pair of those measures, most often \(M_2\)/\(M_0\), is called an actual, empirical money multiplier. In China, \(M_0\) indicates cash, \(M_1\) means cash plus active deposits and \(M_2\) denotes \(M_1\) plus all savings accounts. In the US, \(M_0\) is the total of all physical currency including coinage, i.e., \(M_0\) = federal reserve notes + US notes + coins. It is not relevant whether the currency is held inside or outside of the private banking system as reserves. \(M_1\) is the total amount of \(M_0\) (cash/coin) outside of the private banking system plus the amount of demand deposits, travelers checks and other checkable deposits. \(M_2\) = \(M_1\) + most savings accounts, money market accounts, retail money market mutual funds and small denomination time deposits (certificates of deposit of under 100,000 US dollars). \(M_3\) = \(M_2\) + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of eurodollar and repurchase agreements. \(M_{4-}\) = \(M_3\) + commercial paper. \(M_4\) = \(M_{4-}\) + T-Bills (or \(M_3\) + commercial paper + T-Bills). MB is the total of all physical currency plus federal reserve deposits (special deposits that only banks can have at the Fed). MB = coins + US notes + federal reserve notes + federal reserve deposits. MZM as “money zero maturity” is one of the most popular aggregates in use by the Fed because its velocity has historically been the most accurate predictor of inflation. It is \(M_2 - \mathrm{{time}\,{deposits}} + \mathrm{{money}\,{market}}\) funds. Then L is the broadest measure of liquidity that the federal reserve no longer tracks, which equals to pretty much \(M_4\) + Bankers’ acceptance. Money multiplier = \(M_1\)/MB.

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Acknowledgements

This chapter is a revision of the original version published at Euro-Asian Journal of Economics and Finance, 2015, 3(3): 188–194.

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  1. Nanjing University, Nanjing, China

    Fred Y. Ye

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Ye, F.Y. (2017). Complex Economic Metrics Linking to Scaling Money Supply. In: Scientific Metrics: Towards Analytical and Quantitative Sciences. Understanding Complex Systems. Springer, Singapore. https://doi.org/10.1007/978-981-10-5936-0_10

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  • DOI: https://doi.org/10.1007/978-981-10-5936-0_10

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