“Lack of money is the root of all evil”

George Bernard Saw.

N. Jadhav
Money Concept and Measure
Definitional Issues
Concept of money and measure of
money are different issue.
Conceptualization of money shd precede
its measurement.
1. Priori or Theoretical Approach
2. Empirical Approach
In the theoretical approach money is
first conceptualized in terms of specific
functional or institutional approach and
then the corresponding measure is
obtained by aggregating relevant
financial assets possessing those specific
attributes.
On the other hand empirical approach
does not rely on any preconceived
notion of money. Instead it directly
arrives at a measure of money as an
aggregate of financial assets which,
when introduced in certain functions,
gives the best result in terms of specific
criteria.
-Theoretical approach is superior and
scientific. empirical approach defies
scientific sequence.
Money Stock Measures
The question of appropriate measure of
money is one of most debated issue in
economics. Two theories:
Transaction theories of money:
Money essentially is an inventory held
for transaction purposes. Narrow
Measure.
MV=PT
Asset Theories of money:
Different financial assets are regarded as
alternate ways of holding wealth.
Broader measure.
This debate suggests that what is
referred to as money is not a fixed and
invariant entity, but to a great extent is a
question of preference or judgement.
-As a matter of fact different financial
and real assets could be arranged in a
descending order with reference to
liquidity.
-Currency and demand deposits are the
most liquid assets as they are medium of
exchange. -Time deposits and
government bonds are liquid assets but
can not be converted into medium of
exchange without incurring some cost.
-At the bottom of the liquidity
continuum lie automobiles, real estates
and the like which can be liquidated at
short notice only at a substantial cost.
-The classification of monetary
aggregates currently used by most
central banks is based either on the
functional characteristics of monetary
assets or the institutional distinction
between banks and other financial
intermediaries.
Present Monetary Aggregate
-In India money stock measures
currently published ranges from M1 to
M4. Four measures used in India are:
M1 = Currency (with public) + Demand
Deposits + Other Deposits with RBI.
M1 = C+DD+OD most liquid narrow
money
M2 = M1 + Savings deposits with the
Post Office saving banks.
M3 = M1 + Time Deposits with banks.
Broad Money
M3=M1+TDs
M4 = M3 + All deposits with the post
office saving organization
Broadest measure
Characteristics of Present MA-:
1. Distinction between M1 and M3 is
based on separation of time deposits
with banks (which are deemed to be less
liquid) from currency and demand
deposits with banks.
2. the distinction between M1 and M3
on the one hand and M2 and M4 on the
other is based solely on the institutional
differentiation between banks and post
office saving organization.
3. Among the 4 measures of money, M1
and M3 are extensively used both for
policy purposes and in academic
exercise.
4. M3 captures the balance sheet of the
banking sector, the institutional
category, which has been the focus of
policy since it has a better correlation
with aggregate economic activity.
5. M1 does not adequately capture the
transaction balances of entities because
the manner in which savings deposits
with banks are partitioned into demand
and time categories-purely on the basis
of interest applications.
6. M1 is most liquid and M4 is least
liquid.