Monetary Base
Quick Definition
The total amount of currency in circulation plus reserves held by commercial banks at the central bank — the foundation of the money supply.
Key Takeaways
- Consists of currency in circulation plus bank reserves at the central bank
- The narrowest measure of money (M0) and foundation of the money supply
- Directly controlled by central bank actions like QE and open market operations
- The money multiplier links the monetary base to broader money aggregates
What Is Monetary Base?
The monetary base (also called M0 or high-powered money) consists of all physical currency in circulation (coins and banknotes held by the public) plus reserves that commercial banks hold on deposit at the central bank. It represents the narrowest definition of money and forms the foundation upon which the broader money supply is built through fractional reserve banking. When the central bank conducts open market operations or quantitative easing, it directly expands the monetary base by purchasing assets and crediting bank reserves. Through the money multiplier effect, changes in the monetary base can lead to larger changes in the broader money supply (M1, M2). However, the relationship between the monetary base and broader aggregates weakened significantly after 2008 as banks held excess reserves.
Monetary Base Example
- 1The U.S. monetary base expanded from $800 billion in 2008 to over $4 trillion by 2014 through the Fed's QE programs.
- 2Physical currency in wallets and bank vaults plus reserves at the Fed together comprise the monetary base.
- 3Despite a massive expansion in the monetary base after 2008, broader money supply growth remained modest as banks held excess reserves.
Related Terms
Money Supply
The total amount of money available in an economy at a given time, measured in categories like M1 (cash and checking) and M2 (M1 plus savings and time deposits).
Reserve Requirement
The minimum percentage of deposits that a bank must hold as reserves rather than lending out, set by the central bank.
Open Market Operations
The buying and selling of government securities by a central bank to control the money supply and influence interest rates.
Quantitative Easing (QE)
An unconventional monetary policy where a central bank purchases government bonds and other securities to increase money supply and lower long-term interest rates.
Central Bank
A national institution responsible for managing a country's monetary policy, regulating banks, maintaining financial stability, and issuing currency.
GDP (Gross Domestic Product)
The total monetary value of all finished goods and services produced within a country's borders in a specific time period.
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