Measurement of Money

Measures of money Concepts

No unique definition of money for the purposes of measurement View of Milton Friedman Practical use How people and firms make use of a given instrument For Policy purposes money is defined as Set of liquid financial assets the variation in the stock of which could impact aggregate economic activity For measurement, money could include certain liquid liabilities of a particular set of institutions

Concept of liquidity
Different concepts prevail Stock market Immediacy, Depth and Resilience in relation to execution of trades in the market Financial asset With respect to realizable value Physical asset In relation to ease or difficulty of selling Monetary theory and practice How close is a given asset to money We will use this term only in the above sense When we talk of excess or scarce liquidity we will always refer to money and not any other connotation of liquidity

Measures of money
M0 Reserve Money, Monetary Base or High Powered Money Currency in Circulation + Bankers' Deposits with the RBI + 'Other' Deposits with the RBI Net RBI credit to the Government + Net RBI credit to the commercial sector + RBIs claims on banks + RBIs net foreign assets + Governments currency liabilities to the public RBIs net non-monetary liabilities

M1

Also called narrow money. Non interest bearing money stock

Currency with the Public + Demand Deposits with the Banking System + 'Other' Deposits with the RBI

Currency with the Public + Current Deposits with Banking System+ Demand Liabilities Portion of Savings Deposits with the Banking System + 'Other' Deposits with the RBI
M2 M1 + Savings deposits of post office savings bank

Measures of money
M3 M1 + Time deposits with the banking system Also called Broad Money Currency with the public + Deposits with the banking system + 'Other' Deposits with the RBI Net bank credit to the Government + Bank credit to the commercial sector + Net foreign exchange assets of the banking sector + Governments currency liabilities to the public Net non-monetary liabilities of the banking sector In the above definitions, deposits of non-residents also get included. Non-resident deposit flows related to balance of payments considerations would not constitute domestic demand for money. The RBI therefore has devised a new series of monetary measures using residency concept. It has also introduced some other refinements

Some Important Points

Bankers deposits with the RBI These are CRR deposits Till April 2007 Min. CRR of 3% specified (RBI Act) Effective 1.4.2007, the Act amended. No statutory minimum CRR In the past, CRR balances were remunerated i.e. interest was paid Now, CRR balances earn nothing. Demand liabilities portion of savings deposits is calculated thus minimum balance qualifying for payment of interest treated as time deposit and the remaining demand deposit

Which of the following is money?

Currency notes and coins Balances held in savings bank account Balances held in current account with a bank Amounts held as fixed deposits in a bank Amounts held as fixed deposits in BHEL Amounts held as fixed deposits in a NBFC Amounts outstanding in various mutual find units Money value of shares, bonds and debentures held by various entities Outstanding government securities held by various entities Monetary value of Gold and silver held by citizens Balance available under a credit card limit Letters of credit outstanding Bill of exchange not yet retired Value of Unexpired/Unexercised F & O contracts

Bank Balance Sheet

Capital and Liabilities Share capital Reserves and surplus Deposits Borrowings Other liabilities and Provisions Assets Cash and Balances with RBI Balances with Banks and Money at Call and short notice Investments Advances Fixed Assets Other Assets

Useful ratios: both absolute and incremental Investment Deposit, Cash Deposit, Credit Deposit