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Concept
Monetary base
Summary
In economics, the monetary base (also base money, money base, high-powered money, reserve money, outside money, central bank money or, in the UK, narrow money) in a country is the total amount of money created by the central bank. This includes:
the total currency circulating in the public,
plus the currency that is physically held in the vaults of commercial banks,
plus the commercial banks' reserves held in the central bank.
The monetary base should not be confused with the money supply, which consists of the total currency circulating in the public plus certain types of non-bank deposits with commercial banks.
Open market operations are monetary policy tools which directly expand or contract the monetary base.
The monetary base is manipulated during the conduct of monetary policy by a finance ministry or the central bank. These institutions change the monetary base through open market operations: the buying and selling of government bonds. For example, if they buy government bonds from commercial banks, they pay for them by adding new amounts to the banks’ reserve deposits at the central bank, the latter being a component of the monetary base.
Typically, a central bank can also influence banking activities by manipulating interest rates and setting reserve requirements (how much money banks must keep on hand instead of loaning out to borrowers). Interest rates, especially on federal funds (ultra-short-term loans between banks), are themselves influenced by open market operations.
The monetary base has traditionally been considered high-powered because its increase will typically result in a much larger increase in the supply of demand deposits through banks' loan-making, a ratio called the money multiplier. However, for those that do not agree with the theory of the money multiplier, the monetary base can be thought of as high powered because of the fiscal multiplier instead.
Monetary Policy is generally presumed to be the policy preserve of Reserve Banks, who target an interest rate.
Official source
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