8/23/2022 - Economy and Finance

How do you issue money and what is Monetary Base?

By finguru

How do you issue money and what is Monetary Base?

This note was written by Frederico Rossi.

The Central Bank has three ways to issue money, but only the first two we will develop are the officers:

Organic emission

BCRA acquires international assets, such as gold and currency, under a fixed-rate regime. These currencies, which are no less than the currency of another country, often have an international acceptance, as with the US dollar. These acquired assets enter the BCRA arcas and, on the other hand, the counterpart issue notes and coins registered in its liabilities.

This monetary emission formula was implemented in Argentina in the 1990s, under the presidency of Carlos Menem, where the government and the BCRA set a exchange rate in which the emission of an Argentine peso should be supported by the entry of an American dollar and vice versa. The famous convertibility.

Inorganic or fiduciary emission

It is practically the emission of money without any correspondence with the increase of goods and services or with a decrease of these. The exchange rate is floating, as in most countries of the world.

Problems inflation originates when the Central Bank abuses this mechanism, granting credit to the public sector and joining the payment commitment as an asset and issuing notes that are registered in their liabilities. Also, when the Treasury issue foreign debt, it obtains dollars that are delivered to the Central Bank in exchange for weights so that the Treasury may face surplus expenses.

In Argentina, during management of kirchnerism (when the financing of international markets was not sought), the government Used the Treasury debt, specifically with the several times named “Intransferable Letters of the Treasury”, which went from having a 14% stake in the BCRA asset to almost 66% at the end of 2015.

With the beginning of Government of Macri, the source of funding changed and began to go to international markets. At that time, to prevent all the debt spent since January 2016 from sinking the price of the dollar (product of the large amount of dollars that entered the economy), the BCRA directly bought a part of these funds to the national government and for this emitted weights. This irreparably reduces inflation. Moreover, as most of the debt money was aimed at spending in the country (not imports) generated the need to be exchanged for weights.

Regulation of bank income

The levels banking income are defined by the Central Bank and is the percentage of reserves that each bank must keep immobilized in its arches to face withdrawals of cash by the public. That is, if the income is 10%, for each deposit of $1,000 that you receive should retain $100, while the rest may use it to grant loans. In this way, the smaller that coefficient, the more money can lend the bank, thus generating an expansion of the money with the so-called “secondary recreation of money”.Through the use of currency emission and the use of bank income, the Central Bank can expand the monetary offer.La monetary base It is the sum of money in the hands of the public plus the bank reserves (percentage of the deposits the banks keep in cash so that they can meet the liquidity requests of their customers). However, this is just a small part of all the money that exists in the country to make payments.

Here they come to play what they know as monetary aggregates and make up the total monetary offer. These aggregates are identified with the acronym M (by initial of English money) followed by different numbers, each of which implies an increasingly broader and less net money definition.

In Argentina there are four: M0, M1, M2 and M3.

M0 It is the monetary basis mentioned above.

M1 The M0 is more money in current accounts in the hands of the private and public sector.

M2 The M1 is more money in public and private sector savings boxes.

M3 It is M2 plus private and public sector deposits (fixed spaces, investments, etc.).

So this is made up of the monetary offer.

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