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The effect of the monetary base on money supply – Does the quantity of central bank money carry any information?

Listed author(s):
  • András Komáromi


    (Magyar Nemzeti Bank (central bank of Hungary))

In discussing the transmission mechanism, basic macroeconomics textbooks focus on changes in money supply, which the central bank can control by manipulating the monetary base. Modern central banks, however, take a considerably more complex view of the transmission mechanism, and the operational target of most central banks is to set a short-term interest rate. Under such circumstances, the direction of the mutual effect of the monetary base and money supply is rather the reverse in today’s practice, i.e. the results of the portfolio decisions of economic agents are reflected in the central bank’s balance sheet, determining the size of the monetary base. The article explains the direction of the actual mechanism and argues the point that, contrary to the view still widely held in academic circles, a great deal of the factors affecting the monetary base are exogenous for the central bank. Accordingly, the growth rate of M0 (monetary base or base money) carries no direct information on either the intentions of the central bank or the outlook for inflation.

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Article provided by Magyar Nemzeti Bank (Central Bank of Hungary) in its journal MNB Bulletin.

Volume (Year): 2 (2007)
Issue (Month): 1 (June)
Pages: 31-37

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Handle: RePEc:mnb:bullet:v:2:y:2007:i:1:p:31-37
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