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Lecture 5 Regulation of money circulation and money supply

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1 Lecture 5 Regulation of money circulation and money supply
Money and Credit Lecture 5 Regulation of money circulation and money supply

2 Content 1. Regulation of money circulation. 2. Money supply Monetary aggregates as a way of measuring of money supply Peculiarities of construction of money supply indicators in Ukraine Factors that influence on the volume of money supply.

3 Main definitions: monetary policy targeting inflation currency money supply monetary aggregate monetary base …………..

4 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.

5 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.

6 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.

7 The structure of money supply
active part which is the funds that actually serve economic circulation passive part which includes cash savings, account balances, which can be used as a means of settlement

8 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

9 Monetary aggregates The monetary aggregate is a defined by law in accordance with the degree of liquidity 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.

10 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).

11 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.

12 The main indicators, which characterize the velocity of money, are:
The velocity of money turnover is a frequency of money 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.

13 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.

14 2.2. Peculiarities of construction of money supply indicators in Ukraine.
Evolution of money supply in Ukraine Period M3 total M2 M3–M2 M1 M2–M1 М0 M1–M0 2002 65 129 64 395 40 354 26 434 13 920 24 041 734 2003 95 334 94 603 53 270 33 119 20 151 41 333 731 2004 67 090 42 345 24 745 58 393 222 2005 98 573 60 231 38 341 94 573 925 2006 74 984 48 292 1 650 2007 70 546 4 884 2008 70 369 3 200 2009 76 719 2 526 2010 1 031 2011 3 714 2012 2 072 2013 2 758 2014 1 379

15 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).

16 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.

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