Chapter 3

What Is Money?

Meaning of Money

Money (money supply)anything that is

generally accepted in payment for goods
or services or in the repayment of debts; a
stock concept. Money supply is the total
amount of money available in the
economy. (stock)

Wealththe total collection of pieces of

property that serve to store value (stock)

Incomeflow of earnings per unit

of time (flow)
2

Functions of Money

Medium of Exchangepromotes economic efficiency

by minimizing the time spent in exchanging goods
and services. Facilitates specialization and division of
labor. A good medium of exchange

Must
Must
Must
Must
Must

be easily standardized
be widely accepted
be divisible
be easy to carry
not deteriorate quickly

Unit of Accountused to measure value in

the economy: assets, goods, services.
Store of Valueused to save purchasing power; allows
intertemporal substitution of income

most liquid of all assets but High inflation diminishes its store of
value function.
3

Evolution of the Payments

System

Commodity Money: Gold, Silver, other precious

metals, certain stones, Cigarettes, etc.
Representative money that is backed 100 % by
precious metals (banknotes)
Fiat Money: No consumption or investment use:
intrinsically useless pieces of paper.
Checks
Electronic Payments: EFTs, wire trasfers.
E-money: Debit cards (POS), etc.

Definitions of Money

From most liquid (narrow) to the least

liquid (broad), M0, M1, M2, M2Y, M3..

M0 = paper currency and coins

M1 = M0+ Checking Accounts+ Traveler
Checks
M2 = M1 + Savings Accounts
M2Y = M2 + Forex Accounts

M2Y
1,000,000,000

100,000,000

10,000,000

1,000,000

100,000
M2Y
10,000

1,000

100

10

1
7

900000

800000

700000

600000

500000
M2Y (1987=100)
GDP DEFLATOR (1987=100)
400000

300000

200000

100000

0
1996

1997

1998

1999

2000

2001

2002

2003

2004

Dollarization and Monetary Transmission in Turkey, Erdem BAI Vice Governor Central Bank of
Turkey December 2006

Monetary Policy
90

ISE Bonds and Bills Market Benchm ark

Interest Rate (Com pound)

80
70

CBRT O/N Interest Rate (Com pound)

60
50
40
30
20

11/09/06

04/05/06

23/12/05

16/08/05

11/04/05

02/12/04

23/07/04

17/03/04

03/11/03

27/06/03

05/02/03

23/09/02

15/05/02

02/01/02

10

Asset Dollarization
Share of FX-Denominated Deposits in Total Deposits

43

41
39
37
35
33
31
29

Sep -0 6

Ju n - 0 6

M ar-0 6

D ec-0 5

Sep -0 5

Ju n - 0 5

M ar-0 5

D ec-0 4

Sep -0 4

Ju n - 0 4

M ar-0 4

D ec-0 3

25

Sep -0 3

27

Dollarization and Monetary Transmission in Turkey, Erdem BAI Vice Governor Central Bank of Turkey

10