Economics Questions

Re: Difference between Monetary Base and M0?

Graham Wright — Fri, 11 Sep 2009 00:40:40 GMT

cr113:
The first table is M1. I think you may have hit on something though. After reading the following definition I have a theory. Maybe M1 does not include the second part of the definition of M0, " in bank vaults, plus reserves which commercial banks hold in their accounts with the central bank (minimum reserves and excess reserves)" Maybe the Fed has printed a bunch of money and it's sitting in bank vaults and is not yet counted in M1 or M2.

I think you are correct. Wikipedia is wrong to say that M0 includes bank reserves. (Confusingly, M0 does include bank reserves in the UK definition).

M0:= currency in circulation (columns 1 of the table) + travelers checks (column 2) + cash held by banks/thrift institutions (columns 4 and 5).

MB:= M0 + bank reserves.

M1:= M0 + demand deposits (column 3).

The graph is showing MB. The dramatic uptick is due to injections of reserves. No similar uptick in M1 means that the banks have not increased lending to the same fraction as it was before. They are keeping a higher reserve ratio.

Re: Difference between Monetary Base and M0?

cr113 — Wed, 13 May 2009 18:40:56 GMT

The first table is M1. I think you may have hit on something though. After reading the following definition I have a theory. Maybe M1 does not include the second part of the definition of M0, " in bank vaults, plus reserves which commercial banks hold in their accounts with the central bank (minimum reserves and excess reserves)" Maybe the Fed has printed a bunch of money and it's sitting in bank vaults and is not yet counted in M1 or M2.

M0: currency (notes and coins) in circulation and in bank vaults, plus reserves which commercial banks hold in their accounts with the central bank (minimum reserves and excess reserves). M0 is usually called the monetary base - the base from which other forms of money (like checking deposits, listed below) are created - and is traditionally the most liquid measure of the money supply.^[7]

M1: currency in circulation + checkable deposits (checking deposits, officially called demand deposits, and other deposits that work like checking deposits) + traveler's checks. M1 represents the assets that strictly conform to the definition of money: assets that can be used to pay for a good or service or to repay debt. Although checks linked to checking deposits are gradually becoming less popular, debit cards linked to these deposits are becoming more popular. Like checks, debit cards, as a means to complete a transaction through their links to checkable deposits, can also be considered as a form of money.^[8]

Re: Difference between Monetary Base and M0?

Peter Cohen — Wed, 13 May 2009 16:59:36 GMT

The first column in the first table is M1 (actual printed currency in people's wallets, etc.). Adding all the sums on each row in the table will give you M2. I am not certain as to the answer of the initial question (why does there appear to be a discrepancy between the two reports?), but I suspect the difference is because the federal reserve chart is listing the actually quantity of current currency and demand deposits. While the second table is referring to what the money supply is 'theoretically' if all banks issued loans to the maximum permitted by their fractional reserve requirements.

As I understand it, extra 'liquidity' has been forced upon the banks to 'free up' credit, but thus far the banks have not made the loans they are otherwise permitted. Unless they make those loans, the demand deposits (et al) will not increase, so the reported M2 of the fed will not increase. The problem is that there is nothing standing in the way of the banks deciding to make the loans other than lack of confidence in the borrowers, and if ever they do make all the loans they are allowed, the money supply would increase to the levels indicated in the second chart.

Do not take my answer as authoritative. I am merely guessing until someone more informed comes up with a better answer.

Re: Difference between Monetary Base and M0?

cr113 — Wed, 13 May 2009 16:25:52 GMT

But isn't the "currency" column the same as M0?

Re: Difference between Monetary Base and M0?

fezwhatley — Wed, 13 May 2009 03:55:35 GMT

that first link is not M0, thats one of the M1 tables

Difference between Monetary Base and M0?

cr113 — Tue, 12 May 2009 22:30:48 GMT

When I look up definitions for the Monetary Base and M0 they seem to be the same. But these 2 charts have very different data points.

In this chart M0 is slowly increasing:

http://www.federalreserve.gov/releases/h6/hist/h6hist2.htm

In this chart the Monetary Base is increasing exponentially:

http://research.stlouisfed.org/fred2/series/BASE

Why are these charts different and which is a better indicator of inflation?