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Money Supply

The money supply is the total amount of cash and non-cash funds that are in circulation and determine the national economy.

To analyze the structure of the money supply, money supplies M0, M1, M2, and M3 are used. These indicators are calculated and published by the central banks of various countries. The criteria for the money supply are determined by the International Monetary Fund (IMF), while each country can make changes in the criteria for a specific monetary aggregate.

The money supply M0 is represented only by cash in circulation, namely, banknotes and coins that are in circulation among the population and in the cash desks of organizations. In most countries, this indicator is calculated monthly (for example, in the USA, Canada, Denmark, Russia, Ukraine, Kazakhstan, Poland, Qatar, Venezuela, and Romania), but it can also be calculated quarterly (for example, in Lesotho) and annually (in Laos and Vietnam).

The money supply M1 includes cash in circulation and balances in national currency on settlement, current and other accounts in demand from the population, organizations (except credit ones) that are Russian residents. In many countries, this indicator is also calculated and published monthly. Examples include Australia, Austria, Switzerland, Bulgaria, Colombia, India, Georgia, and Moldova.

In most countries, there is a money supply M2, which consists of cash in circulation and non-cash funds (deposits of individuals and legal entities in national currency). It is this money supply that is key in the monetary statistics of most countries in the world. Examples include indices for the Czech Republic, Eurozone, Germany, Hungary, Mexico, Norway, and Turkey.

In a number of countries, central banks calculate and publish the values of the money supply M3. This is the so-called broad money supply, which includes all of the above supplies, time deposits in foreign currency, as well as savings in the form of precious metals, stones, and the value of securities (except for company shares). In most countries, this indicator is also calculated monthly (e.g., in Japan, Botswana, Finland, Lithuania, and Spain).

To analyze the level of saturation of the country’s economy with liquid assets, such an indicator as the level of monetization is used, which is equal to the ratio of the money supply to the country’s gross domestic product (GDP). It is believed that if the monetization of the economy is more than 50%, then the funds are sufficient for settlements. Most often, the M2 is used to calculate the indicator, but the M1 and M3 supplies can be used, too. The higher the difference between M3/GDP and M1/GDP, the more developed non-cash payments are in the country, and, conversely, a small difference between these indicators suggests that the country has more developed cash circulation.

In practice, the ratios between money supplies are also calculated to assess the level of development of cash and non-cash turnover in the country. In developed countries, as a rule, non-cash money circulation prevails, and in developing countries, cash is most common. The ratio between money supplies can change with economic growth in a country.

To analyze the dynamics of the money supply, the absolute growth and the growth rate of one of the money supplies (most often M2) are calculated. Growth in absolute terms is usually calculated in relation to the previous month, and the growth rate can be calculated in relation to the previous month, to the same month last year, and to the beginning of the year. Excessive growth in the money supply in the economy can lead to inflation and a depreciation of the national currency, which, in turn, entails an increase in prices for imported goods and a reduction in the cost of export products. However, if the increase in the money supply is moderate, then this leads to a decrease in interest rates and, consequently, an increase in the availability of credit resources for the population.

In recent years, the money supply has grown at the fastest pace in the USA, Eurozone, Japan, and China. The graph below shows the dynamics of the money supply in these countries (using the example of the money supply M2) for 2016 - early 2021.

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