Analys of monetary mass în Moldova

What is Broad Money?

At the outset, ‘money’ needs to be defined, and this is traditionally done through its principal function — a medium of exchange or means of payment. Money exists because of frictions and trading costs associated with conducting sequences of transactions at different times across a range of different markets. In particular, money eliminates the need to find individuals who wish to trade one particular good for another, known as the double coincidence of wants. Money also facilitates timely settlement of transactions, avoiding the need to extend credit to those about whom the seller may know very little. However, households and companies settle many transactions using their deposits with banks and building societies. These deposits are typically included in a wider definition. Studying of the money functions and money circulation allow to assess the qualitative side of monetary phenomenon, but execise of money functions is directly related to the quantity of money in circulation, which change, can produce multiple effects. In order to simplify the process of monetary analysis, economists introduced the notion ”Broad Money”. The appropriate definition of broad money is by no means universal or constant. Differences across countries and over time largely reflect the structure of the financial system. For example, alternative assets may increasingly become ‘money-like’ as they are used for settling transactions.Actualy broad money represent the totality of liquid assets that exist in a economy at a certain period of time. In other words, „Broad Money” represent all assets that can be used for payment intermediation.

According to monetarists, threre are several well defined assets that form broad money. These assets are: cash, sight and term deposits, instruments of monetary and capital markets and foreign currency.

Instruments of monetary markets are the short-term debts and securities which maturity are from 1 day up to 1 year, for ex: treasury bills, federal agency notes, certificates of deposit (CDs), commercial paper, bill of exchange, promissory note and so on.

Instruments of capital market are are responsible for generating funds for companies, corporations and sometimes national governments. These are used by the investors to make a profit out of their respective markets, these instruments usualy have a maturity up to fifty years, examples of instruments of capital market are: stocks, bonds, shares, swap options, derivatives, futures and so on.

These assets are classified into aggregates, economists use a capital letter "M" followed by a number to refer to the calculation that they are using in a given context, they are called monetary aggregates.

Monetary aggregates represent several sets of monetary assets that have different structure and content.

In our country there are 4 monetary aggregates

• 1-st monetary aggregate is M0 that consist of physical paper money and coins in circulation(cash).

• 2-nd monetary aggregate is M1 that consist of M0+ sight deposits

• 3-rd monetary aggregate is M2 that is made up by M1+ term deposits +Instruments of monetary system

• 4-th monetary aggregate is M3 that is made up by M2+ foreign currency +Instruments of capital market

M0 M1 M2 M3

Cash X X X X

Sight Deposits X X X

Term Deposits X X

Instruments of Monetary Market X X

Foreign Currency X X

Instruments of Capital Market X

The 4-th aggregate M3 reprezent all Broad Money in our economy.

Factors that influence Broad Money

Now let take a look through elements that influence money supply, respectively influence Broad Money:

• Remittances- represent transfer of money by a foreign worker to an individual in his or her home country. Money sent home by migrants competes with international aid as one of the largest financial inflows to developing countries. Workers' remittances are a significant part of international capital flows, especially with regard to labour-exporting countries.

Effects of Remittances

• Money Issuing- Banknotes and coins issue is one of the most important functions of the monetary authority. Usually, central bank, which is also referred to as a monetary authority has the exclusive right to issue the national banknotes and coins.It should meets the demand of the economy for money by supplying it regularly with banknotes and coins. It determines the format, dimension, weight, design and other features of banknotes and coins, as well as banknotes and coins produced for numismatic purposes. So if monetary authorities decide to issue more money, it will increase the volume of broad money

• Volume of products

• Taxes- Tax policy is the choice by a government as to what taxes to levy, in what amounts, and on whom. It has both microeconomic and macroeconomic aspects. The macroeconomic aspects concern the overall quantity of taxes to collect, which can inversely affect the level of economic activity and volume of broad money,this is one component of fiscal policy

• Investments- can be used to refer to any mechanism used for the purpose of generating future income. In the financial sense, this includes the purchase of bonds, stocks or real estate property. Additionally, the constructed building or other facility used to produce goods can be seen as an investment. The production of goods required to produce other goods may also be seen as investing.So the more investments, the biger is volume of broad money.

• Money creation (also known as credit creation) is the process by which the money supply of a country or a monetary region is increased. A central bank may introduce new money into the economy by purchasing financial assets or lending money to financial institutions. However, in most countries today, most of the money supply is in the form of bank deposits, which is created by the fractional reserve banking system. So whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

• Public's Desire to Hold Currency and Deposits. People's desire to hold currency (or cash) relative to deposits in commercial banks also determines the money supply. If people are in the habit of keeping less in cash and more in deposits with the commercial banks, the money supply will be large. This is because banks can create more money with larger deposits. On the contrary, if people do not have banking habits and prefer to keep their money holdings in cash, credit creation by banks will be less and, the money supply will be at a low level.

• Velocity of money- refers to how fast money passes from one holder to the next. It can refer to the income velocity of money, which is the frequency at which the average unit of currency is used to purchase newly domestically-produced goods and services within a given time period. In other words, it is the number of times one unit of money is spent to buy goods and services per unit of time.Alternatively and less frequently, it can refer to the transactions velocity of money, which is the frequency with which the average unit of currency is used in any kind of transaction in which it changes possession—not only the purchase of newly produced goods, but also the purchase of financial assets and other items.If the velocity of money is increasing, then transactions are occurring between individuals more frequently. Although once thought to be constant, it is now understood that the velocity of money changes over time and is influenced by a variety of factors