Money supply impact on inflation

Money supply affects inflation in the longer term, often with one and two years delay. It is a very important factor, since there is a strong correlation (albeit with a degree of transmission) between monetary growth and inflation. We are talking about a positive correlation, which means that if money supply increases as inflation is expected to increase, and vice versa for the reduction.

It is important to note that central banks are closely watching the growth and size of the money supply to keep inflation under control.

Central banks buy or sell fixed-income securities (bonds / treasury bills) in order to influence the money supply, leading to an increase or decrease in available cash that can be used for consumption.

How can central banks ‘print money’

If a central bank reduces money supply, it can for instance sell treasury bills. In this way, the liquidity of the market are reduced and thus consumer demand. When a central bank then buys back the t-bills, the money supply increases, because the central bank puts cash in the market, thus increasing consumer demand. This is what is often called that a country print money or take the bank note press – which been announced that the United States, UK and Japan have done in 2009.

The central bank also affects the money supply when it transforms the short-term interest rate increasments, it becomes more profitable to save than spending and the reverse is true for a interest rate cut.

But what is money supply really? Usually, you can count all relatively liquid assets to be used for consumption. They are often referred to as the M3. You hear all the holdings of money in the form of banknotes and coins, M0, and all deposits in banks, certificates of deposits in both domestic currency and in any currency.

Vad menas med penningmängd egentligen? Till det räknas alla tillgångar som är relativt likvida för att på kort tid kunna användas för konsumtion och kallas for M3. They include all holdings of money in the form of banknotes and coins, M0, and all deposits in banks, certificates of deposits in both domestic currency and in any currency.

The most important factor is the deposits, as more transactions are made today with credit cards and thus has M0′s weight decreased. US money supply is calculated by Federal Reserve and UK money supply are calculated by .

Measurements for money supply in UK

There are only two official statistical measurements in United Kingdom by Bank of England.

  • M0: Cash outside Bank of England + Banks’ operational deposits with Bank of England.
  • M4: Cash outside banks (ie. in circulation with the public and non-bank firms) + private-sector retail bank and building society deposits + Private-sector wholesale bank and building society deposits and Certificate of Deposit.

International websites for monetary policies

For Japanese monetary policies go to BOJ website, for Australian money supply go to, for European statistics over monetary aggregates got to ECB’s website, for Chinese monetary policy go to PBC, for Canadian money supply go to Bank of Canada, for Swedish monetary policies go to Riksbanken and for Indian statistics go to RBI.

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Article written by Athanasios Karagiannis and Markus Jalmerot.
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