Monetary Theory and Policy
Chapter 3：What Is Money?
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Meaning of Money
What is it?
Money: anything that is generally accepted in payment
for goods or services or in the repayment of debts.
A rather broad definition
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Meaning of Money
Money (a stock concept) is different from:
Wealth: the total collection of pieces of property that
serve to store value
Income: flow of earnings per unit of time
(a flow concept)
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Functions of Money
Medium of Exchange:
Eliminates the trouble of finding a double coincidence of
needs (reduces transaction costs)
Promotes specialization
A medium of exchange must
be easily standardized
be widely accepted
be divisible
be easy to carry
not deteriorate quickly
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Functions of Money
Unit of Account:
used to measure value in the economy
reduces transaction costs
Store of Value:
used to save purchasing power over time.
other assets also serve this function
Money is the most liquid of all assets but loses value during
inflation
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Evolution of the Payments System
Commodity Money: valuable, easily standardized and
divisible commodities (e.g. precious metals, cigarettes).
Fiat Money: paper money decreed by governments as
legal tender.
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Evolution of the Payments System
Checks: an instruction to your bank to transfer money
from your account
Electronic Payment (e.g. online bill pay).
E-Money (electronic money):
Debit card
Stored-value card (e.g., ETC)
E-cash
AliPay, Wechat Pay
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Are We Headed for a Cashless Society?
Predictions of a cashless society have been around for
decades, but they have not come to fruition.
Although e-money might be more convenient and
efficient than a payments system based on paper,
several factors work against the disappearance of the
paper system.
However, the use of e-money will likely still increase in
the future.
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Will Bitcoin Become the Money of the Future?
Bitcoin is type of electronic money created in 2009.
By “mining,” Bitcoin is created by decentralized
users when they use their computing power to verify
and process transactions.
Although Bitcoin functions as a medium of exchange
it is unlikely to become the money of the future
because it performs less well as a unit of account and
a store of value.
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Measuring Money
How do we measure money? Which particular assets
can be called “money”?
Construct monetary aggregates using the concept of
liquidity:
M1 (most liquid assets) = currency + traveler’s checks +
demand deposits + other checkable deposits.
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Measuring Money
M2 (adds to M1 other assets that are not so liquid) =
M1 + small denomination time deposits + savings
deposits and money market deposit accounts + money
market mutual fund shares.
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Table 1 Measures of the Monetary Aggregates
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Figure 1 The Federal Reserve’s Monetary Aggregates
M1 (4)
M2 (4+3)
Currency
Small Den. Dep.
Traveler’s Checks
Savings and MM
Demand Deposits
Money Market Mutual
Other Check. Dep Funds Shares
M3 (4+3+4)
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M1 vs. M2
Does it matter which measure of money is considered?
M1 and M2 can move in different directions in the short
run (see figure).
Conclusion: the choice of monetary aggregate is
important for policymakers.
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中国人民银行
1994年10月28日，央行印发《中国人民银行货币供应量
统计和公布暂行办法》
M0：流通中现金
M1：M0＋企业存款＋机关团体部队存款＋农村存款＋
信用卡类存款（个人持有）
M2：M1＋城乡居民储蓄存款＋企业存款中具有定期性
质的存款＋外币存款＋信托类存款
M3：M2＋金融债券＋商业票据＋大额可转让定期存单
等
M3出于金融创新不断出现的现状考虑而设，目前暂不编
制这一层次货币供应量。
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中国人民银行
央行已经先后对货币供应量统计口径进行了四次修订
1. 2001年6月，由于股票市场发展，央行将证券公司客户
保证金计入M2
2. 2002年，WTO后央行将在中国的外资、合资金融机构的
人民币存款，分别计入不同层次货币供应量
3. 2011年10月，鉴于非存款类金融机构在存款类金融机构
的存款和住房公积金存款规模较大并已对货币供应量造成
影响，央行将上述两类存款纳入M2的统计范围
4. 2018年1月，央行完善货币供应量中货币市场基金部分
的统计方法，用非存款机构部门持有的货币市场基金取代
货币市场基金存款（含存单）
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FIGURE 2 Growth Rates of the M1 and
M2 Aggregates, 1960–2014
• Source: Federal Reserve Bank of St. Louis, FRED database: [Link]
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How Reliable are the Money Data?
Revisions are issued because:
Small depository institutions report infrequently
Adjustments must be made for seasonal variation
We probably should not pay much attention to short-
run movements in the money supply numbers, but
should be concerned only with longer-run movements
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Table 2 Growth Rate of M2: Initial and Revised
Series, 2008 (percent, compounded annual rate)
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