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American Journal of Business, Economics and Management

2015; 3(3): 113-116

Published online April 20, 2015 (

Assessment of Money Supply in Circulation: Some

Topical Issues
A. A. Ismailov
Tashkent Financial Institute, Department of Banking, Tashkent City, Uzbekistan

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To cite this article

A. A. Ismailov. Assessment of Money Supply in Circulation: Some Topical Issues. American Journal of Business, Economics
and Management. Vol. 3, No. 3, 2015, pp. 113-116.


In the economic literature there are controversial questions about the assessment and management of money supply in
circulation. A group of scientists and economists believe that there is no need to analyze the short-term fluctuations in the
money supply, because short-term fluctuations in the money supply are largely dependent on seasonal factors. In addition,
there is no consensus among scientists and economists about the choice of a particular monetary aggregate as an indicator of
monetary policy. This paper analyzes the current issues of assessment of money supply in circulation.
Money, Money Supply, Monetary Aggregate, Cash, Supply of Money, Demand for Money, Transaction Deposits, Targeting

monetary units are widely used:

1. Introduction M0 the cash issued by the Central bank;
In this paper, there has been carried out a comparative and M1 - M0 + demand deposits + traveler's checks + credit
critical analysis of the existing approaches to the assessment
of the money supply. M2 - M1 + time deposits + savings deposits;
M3 M2 + deposit certificates + savings certificates + state
The author formulated scientific conclusions and
developed specific proposals to improve the assessment of
money supply in circulation. In particular, the author In the USA corporate securities are also considered in
concluded that the inclusion of short-term fluctuations in the structure of monetary aggregates. They are considered in
money supply is important in those countries where there is structure of the monetary aggregates L.
applied the targeting of the money supply. In our opinion, the need of quantitative measurement of
money supply is defined by the following factors:
1. In system of the macroeconomic analysis the monetary
2. Main Part analysis is important. And money supply is the main
monetary indicator.
Assessment and management of the money supply are the
key issues of monetary policy. Since assessment of the 2. The offer of money is object of monetary and credit
regulation of the economy. Therefore there is a need of
money supply allows us to estimate the demand for money,
providing an optimum level of money supply.
the deviation of the money supply from demand for it,
changes in the level of monetization of the economy, to 3. Low level of provision of the economy with money will
assess the populations propensity to save and accumulate. lead to the delay of macroeconomic growth rate. And the
Also, the assessment of the money supply allows us to appearance of additional money in circulation promotes
estimate the monetary gaps. strengthening of inflationary processes.
Quantitative measurement of money is widely put into 4. The central bank, providing the stable growth of money
supply, positively influences on development of the national
practice and on the basis of it the level of money supply is
estimated. It is most often used monetary aggregates as
quantitative measuring instruments of money supply. Changes in the money supply and its growth rate influence
In the international banking practice the following on important economic variables, they can also affect the
114 A. A. Ismailov: Assessment of Money Supply in Circulation: Some Topical Issues
Currently, many countries developed countries, cash
use money supply targeting. and transaction deposits
For example, the US Federal occupy a relatively low
achievement of the main Reserve under the leadership specific weight in the total volume of the monetary
development objectives of A.Bernsdeclared about the aggregate M2 and M3. But
the national economy (1). transition to the regulation in countries with economies
In the economic literature of the money supply as the in transition cash and
there are different basic regime of its policy transaction deposits occupy
approaches to the and the object of control a relatively large specific
assessment of the money became the monetary weight in the total volume
supply. For example, aggregate M1 (4). of the monetary aggregate
F.Mishkin believes that Germany's central bank - M2 and M3. So, as of
while making assessment of the Bundesbank, since 1988 January 1, 2014, in
the money supply one has been using monetary Uzbekistan the specific
should not pay much aggregate M3as an indicator weight of transaction
attention to short-term of monetary policy. The deposits in total volume of
fluctuations in the money Central Bank of Uzbekistan deposits of commercial
supply, but instead long- has been using monetary banks amounted to 45.4%
term changes should be aggregate M2 as an indicator (6).
analyzed (2). of monetary policy (5). In the banks of developed
F.Mishkinis right in the According to R.Miller and countries, including
sense that the seasonal D.Van-Hoose, the use of commercial banks of the US
adjustment of data on the monetary aggregate M1as an and Western Europe the
money supply leads to indicator of monetary policy specific weight of
significantly different of the US Federal Reserve is transaction deposits in total
results when new data volume of deposits does not
due to an increase in cash in
appears. exceed 30%.
circulation: "in the US the
However, in our opinion, significance of cash has In addition, in many
taking into account short- grown as it is or as a countries with economies in
term fluctuations in the component of the index M1. transition, cash occupies a
money supply is important For example, in 1973 in the relatively large specific
in those countries where the US the amount of cash in weight in the total volume of
targeting of the money circulation was around $ 325 money supply. For example,
supply is applied. This is per capita. By 1993 it had the ratio of cash by
due to the fact that in certain risen to $ 1,050. The share aggregate M0 to GDP was as
months of the current fiscal of cash in the monetary follows: in Russia - 10.9%,
year occurs, quite probably, aggregate M1 increased China - 11.8%. At the same
a sharp increase in the from 20.5% at the end of time, the value of this
quantity of money in 1960 to more than 30% at indicator comprises in
circulation due to various the end of 1992"(5). Germany - 8.9%, in France -
reasons. In particular, price 8.5%, in the US - 6.9% and
Currently, the European
increases for goods and in Canada - 3.6% (7).
Central Bank uses monetary
services of natural aggregate M3(6)as an From the above it can be
monopolies, the financing indicator of monetary policy. concluded that in countries
of the state budget expenses This is due to the fact that in with economies in
out of Central Banks the structure of the monetary transition, where cash and
credits, increasing of aggregate M3 the amount of transaction deposits occupy
inflation rate etc. As a deposit and savings a relatively large specific
result, in certain months of certificates has a relatively weight in the total money
the financial year, there is a high growth rate. supply, it is necessary to use
high growth rate of the In our opinion, in monetary aggregate M1 as
money supply and, in the countries with economies in an indicator of monetary
final analysis, the Central transition, in the assessment policy. Since, in this case
Bank will not be able to of the money supply in the use of M2 as a monetary
keep the growth rate of the circulation there must taken indicator cannot really
money supply within the into account the growth rate assess the impact of money
specified parameters. of the components of the supply on the basic
Therefore, only in 54% of monetary aggregates and macroeconomic indicators,
cases central banks were specific weight of each including the economic
able to achieve their goals component in the total activity of population.
(3). volume of money supply. Now credit expansion of
This is because in the commercial banks has an
emission character. That is, money depends not only on
the main part of money in the nominal income, but
circulation is the results of also on the level of interest
credit expansion of rates (12).
commercial banks.
Therefore, while estimating
the money supply in
circulation, the assessment
of level of credit expansion
of commercial banks places
an important role.
According to Mises, in a
free banking system any
bank, unilaterally
expanding the credit by
reduction of a cash reserve
below reasonable level,
risks to be insolvent (9).
It is necessary to
emphasize that too high
level of credit expansion of
commercial banks will lead
the increase of money
supply, as the results of
which inflationary
processes intensify. In M.
Thatchers opinion, in the
period of her being the
prime minister, the quantity
of money and the credits
grew too fast and as a result
of it the prices of assets
raised (10).
M. Freidman also
recognized an important
role of credit expansion of
banks in the formation of
the money supply.
Therefore he suggested to
introduce100 percentage
reservations of deposits of
commercial banks. But
many scientists-economists
criticized this idea of M.
Freidman. For example,
one of prominent scientists-
economists of Huerta de
Soto considers that if to
support 100 percentage
coefficient of reservation, it
can lead to death of a
banking system (11).
The world famous
scientist-economist J. M.
Keynes, generalizing the
factors that affect quantity of
money in circulation, noted
the nominal and real sizes. In
Keyness opinion, the
nominal size of money
supply directly depends on
price level, and demand for
American Journal of Business, Economics and Management 2015; 3(3): 113-116 115
Unfortunately, in many
countries with economies in [2] Mishkin F.S. Economic
theory of money, banking
transition, commercial and financial
Based on the above- banks have weak resource markets.Trans. from
mentioned, it can be base, there is a lack of long- English. - M.: OOO "I.D.
concluded that the level of term resources. For Williams", 2013. - P. 95.
credit issuance of example, in [3] Moiseev S.R. Monetary
commercial banks is very M.Matovnikovas opinion, Policy: Theory and
important in the evaluation the lack of long-term Practice. - M.: Moscow
and management of the resources in Russia is a Financial-Industrial
money in circulation. Academy, 2011. - P. 358-
generally recognized 359.
It is important to note that phenomenon(14).
in many countries with In developed countries, [4] Moiseev S.R. Monetary
economies in transition, Policy: Theory and
developed stock market Practice. - M .: Moscow
level of credit issuance of allows banks to attract Financial-Industrial
commercial banks is long-term resources by Academy, 2011. P. 355.
relatively low. This is due to issuing long-term bonds. Source: Central bank of Uzbekistan
many factors, the most [5] Resolution of the Cabinet
The adequacy of the Figure 1. The level of loans of of Ministers of the
important of these is the low deposit base of western commercial banks in USA, Japan Republic of Uzbekistan
level of development of the commercial banks is also and South Korea in relation to #63 dated February 4,
banking system, the gross domestic product, as of
important. January 1, 2013(16)
2003 "On measures to
financial instability of the improve the regulatory
In many countries with mechanism of monetary
enterprises and the economies in transition,
relatively low level of 3. Conclusion indicators." - Collection
relatively high rate of of legislation of the
household savings. money grow this explained Republic of Uzbekistan. -
As results of research of Tashkent, 2003. - #3.
mainly by high inflation
Table 1. The level of credit famous scientists-economists
investments of commercial banks in and a poor regulatory
note, the calculation of short- [6] Miller R.L., Van Hoose
relation to gross domestic product system of the money D.D. Modern money and
in some countries with economies term fluctuations of money
supply. For example in supply is important in those
banking. Trans. from
in transition(13) English. - M.: INFRA-M,
Russia, by the results of countries where targeting of
# COUNTRIES 2011 2000. - P. 50.
2013the inflation was 6.5%, the monetary offer is applied.
1 Ukraine 61,6 exceeding the established [7] European Central bank.
2 Russia 42,6 target range (15). In countries with Annual Report 2013.
3 Armenia 33,2 economies in transition, the
4 Kazakhstan 31,8 In developed countries,
close interrelation between
5 Byelorussia 57,4 the credit investment of [8] Author's calculations
cash monetary circulation
6 Azerbaijan 18,8 commercial banks is the according to the website
7 Tajikistan 13,7 and economic activity is
main source of growth of
8 Kyrgyzstan 11,4 observed. Besides,
the money supply. This is
transactional deposits have
Source: Central bank of Uzbekistan explained by the relatively
rather big specific weight in
high level of credit
investments of commercial the total amount of deposits
As can be seen from the of commercial banks. In
data presented in Table#1, banks (Figure 1).
such conditions, it would be
in the analyzed countries, As can be appropriate, to use the
the level of credit issue of seenfromFigure#1, in the
monetary aggregate M1 as
commercial banks is analyzed countries, the
the indicator of monetary
relatively low. This loans from commercial
banks take a relatively large policy of the Central bank.
indicates that the credit
specific weight in relation When assessing the
issue of banks in these
to GDP. money supply in circulation,
countries is not a
the assessment of level of
determining factor in the
credit expansion of
growth of money in
commercial banks is very
important as the main part of
Especially in Azerbaijan, money in circulation results
Tajikistan and Kyrgyzstan from credit expansion of
loans occupy a very low banks.
specific weight in relation to
The growth rate of credit References
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