Copyright  2011 Pearson Canada Inc Chapter 3 What Is Money?

Copyright  2011 Pearson Canada Inc Meaning of Money Money - anything that is generally accepted in payment for goods or services or in the repayment of debts; a stock concept Wealth - the total collection of pieces of property that serve to store value Income - flow of earnings per unit of time

Copyright  2011 Pearson Canada Inc Functions of Money Medium of Exchange - promotes economic efficiency by minimizing the time spent in exchanging goods and services Unit of Account - used to measure value in the economy Store of Value - used to save purchasing power; most liquid of all assets but loses value during inflation

Copyright  2011 Pearson Canada Inc Functions of Money I If money is not unique as a store of value, why do people hold money? –The answer is liquidity, the relative ease and speed which an asset can be converted into a medium of exchange.

Copyright  2011 Pearson Canada Inc Evolution of the Payments System Commodity Money Fiat Money Cheques Electronic Payment E-Money

Copyright  2011 Pearson Canada Inc Measuring Money I Float – funds in transit between the time a cheque is deposited and the time the payment is settled. Measures of Money Supply: –M2 –M3 –M2+

Copyright  2011 Pearson Canada Inc Measuring Money II

International Compasion Source: Y.C. O’Brien “Measurement of Monetary Aggregates across Countries”, FEB, Washington, D.C., Copyright  2011 Pearson Canada Inc

Copyright  2011 Pearson Canada Inc

Why so Many Different Scopes of Money Supply? They have evolved over time; Some scope of MS became more sensitive to interest rates. This made that particularly scope of MS less attractive for the Monetary Authority The Monetary (Policy) Authority has come up with a new scope of MS which is less interest- rate elastic. And the Monetary Policy is set in terms of that new scope of MS. Copyright  2011 Pearson Canada Inc

Copyright  2011 Pearson Canada Inc Money as a Weighted Aggregate The Bank of Canada’s money supply measures are ‘simple-sum’ indices, the index M = x 1 + x 2 + … + x n, Where x j is one of the n monetary components of the monetary aggregate M Weighted monetary aggregates seem to predict inflation and the business cycle somewhat better than the conventional measures

Copyright  2011 Pearson Canada Inc Measuring Money

Copyright  2011 Pearson Canada Inc 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.

Copyright  2011 Pearson Canada Inc Would Cyber-Money or e-Money replace and phase out Cash or/and Deposit Money (=Currency)? -What is e-Money or cyber money? -What are the advantages and disadvantages? -Would they replace Cash or/and DM? Excellent Paper at The Economist MagazineThe Economist Magazine

Very Recent Trends Initially, we thought that Banks and Currencies will never be replaced with mobile banks and e-money. (2001) Now we see some changes in people’s attitudes towards mobile banks, e- Money, internet funds, and non-bank payment means: In China, banks-drained-by-funds-called-vampires-seek-ruleshttp:// banks-drained-by-funds-called-vampires-seek-rules In the world, investment on Bitcoin is growing fast: surpassing-2014-total/ surpassing-2014-total/ Free banking, in which different paper monies competed beyond any government regulations and supports, is now relevant again. Copyright  2011 Pearson Canada Inc