DEFINE AND MEASURE MONEY

(Miller, Ch. 3)

Why it is important to define and measure

money?
What are the transaction and liquidity approaches
to measuring money?
What is the best definition of money?
Does money have a future?

Importance to define and measure money

Money
Money

Definition of
Money

Theoritical

Emphirical

Quantityofof
Quantity
Money
Money

Inflation
Inflation
Interestrate
rate
Interest
Employment
Employment
Exchangerate
rate
Exchange
Nat.income
income
Nat.
Nat.output
Nat.output

How to
measure?
Transaction
Approach

Money as
Medium of
Exchange

Liquidity
Approach

Money as
Store of Value

Ec.
Ec.
Growth
Growth

Approaches to Defining and

Measuring Money
1. The transaction approach:

Emphasizes moneys function as medium of

exchange
We should only include assets that serve as
media of exchange in the empirical
measurement of money (coins and paper
currency, checkable accounts)
Transaction motive for holding money
If total money supply rise spending rise,
so: national income, national input,
employment and price level rise to

2. Liquidity Approach:

Money as a store of value

money is the most liquid of all assets.

An individual does not need to convert

money into something before purchasing
a good and
Money All assets that people can

convert into money quickly without

loss of nominal dollar value and
without much cost

Measuring Money-1 (in US):

1. The Narrowest Measure of Money

(MB):
MB = Currency +Total Reserves of
Depository Institutions

2. M1= The Transactions Approach

M1= Currency +
Transaction deposits (Demand
dep. + Other checkable deposits) +
Travellers checks

M2 = The Liquidity Approach

M2 = M1 +
Saving deposits and money market
deposits +
Small-denomination time deposits +
Overnight RPs and Eurodollar +
Money Market mutual funds

M3 :

An Even Broader Definition of

Money

M3 = M2 +
Large denomination time deposits at all
depository institutions +
Term repurchase aggreement at
commercial banks and savings and loan
associations +
Term eurodollars +
Institutions-only money market mutual funds
balance

Measuring Money (in Indonesia):

1.

Uang Inti/Uang Primer (M0):

M0 = C + R
dimana:
C = uang kartal (kertas dan koin)
R = Saldo giro bank umum di Bank
Sentral (BI)

Cont.

2. Uang beredar dalam arti sempit

(M1):
M1 = C + D
dimana:
C = uang kartal (kertas dan koin)
D = uang giral

3. Uang beredar dalam arti luas

(Likuiditas Perekonomian)/M2

M2 = M1 + T
dimana:
T = Uang Kuasi (uang yang disimpan
dalam rekening tabungan dan
deposito berjangka)

Why the definition of money differ

among country?
Definisi uang beredar di berbagai negara
bervariasi, sesuai kondisi sektor
keuangan dan perbankan serta
kebutuhan otoritas moneter negara
bersangkutan

Contoh:
US
: M1,M2,M3
Inggris : M1, M2, M4
Kanada : M1,M2,M2+, Adjusted M2+, M3

What is the Best Definition of Money?

The criterions of Monetary Policy

1. A close correspondence must exist between the

theoretical definition of money and the

emphirical(measurable) definition of money
2. An ability on the part of the monetary authorities
to control empirically defined money supply
3. A close and predictable relationship between
changes in the empirically defined money supply
and ultimate national economic goals

The Future of Money:

(The Evolution of Money: An empirically view)

Barter

Commodity Money
(gold & silver)

Electronic money

Intangible
money

(e-money)

Paper money
(certificate)

Bank money
(demand deposit)