Money Supply As An Indicator Of Monetary Regulation


The level of saturation of the economy with money is determined by several significant factors. In particular, it depends on the development trends of the economy, payment discipline and applicable forms of payments. In modern conditions, the money supply as a macroeconomic indicator correlates and affects the formation of supply and demand, fiscal balance and price stability. Monetary aggregates consist of elements characterized by varying degrees of liquidity and affect income, employment, products and other economic parameters. An analysis of real laws and relationships in the sphere of money supply allow us to assess the qualitative and quantitative composition of monetary aggregates that have a significant impact on the processes occurring in the real Russian sector, which, in the end, has applied interest. The article discusses the theoretical and applied aspects of the formation of the money supply, as well as the specifics of monetary aggregates in the current conditions.

Keywords: Money supplymonetary aggregatesmonetary regulation


The volume of money supply and the structure of monetary aggregates are significant macroeconomic indicators affecting price volatility, changes in the volume of output of goods and services, as well as employment and inflation. Cash flow and their dynamics are the totality of monetary relations, which are reflected in the country's payment system, which makes it necessary to study the categories of money supply and monetary aggregates.

Problem Statement

Data on macroeconomic indicators, which reflect the parameters of money and money circulation, allow us to talk about the size of the money supply in a specific time period, as well as about changes in the volume of money supply in the country. This, in turn, makes it possible to draw conclusions about economic development trends and make adequate management decisions.

Research Questions

Money supply has an established concept. This question was developed in classical economic theory.

Table 1 -
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Due to the need to manage and control the amount of money in circulation, one of the areas of research of money and money circulation revealed the need to measure money supply. The problem of measuring money supply has determined the need to introduce the concepts of “narrow” and “broad” money aggregates, which are the “stock” of money in the economy. So, Friedman and Schwartz (1971) focused on money aggregates: М 1, М 2, М 3, М 4 and offered such elements of the money supply as cash (including American Express coins and travelers checks), bank deposits, demand deposits and savings deposits in commercial banks, deposits of mutual savings banks and the postal savings system, shares of loan and savings associations, cash valuation of life insurance policies and state savings bonds. In turn, these aggregates have been implemented in the practice of monetary regulation of economic activity of countries, but the composition and number of monetary aggregates vary depending on the conditions and characteristics of the country's national money market. So, for example, the USA uses money aggregates М 1, М 2, М 3 and L , which ultimately form its money supply.

Purpose of the Study

The goal is to assess the money supply and monetary aggregates. The article discusses the theoretical and practical aspects and characteristics of the money supply and monetary aggregates.

Research Methods

The economy of the Soviet period did not include monetary policy in the toolkit of monetary regulation of the economy. The market economy has made adjustments in the sphere of money and money circulation, which introduced the category of “monetary base” in a narrow and broad definition.

The monetary base in a narrow definition is formed from cash and required reserves of credit organizations in the Bank of Russia. Additionally included balances on correspondent and deposit accounts of credit organizations with the Bank of Russia and Bank of Russia bonds form a broad monetary base.


The Bank of Russia, pursuing a monetary policy, began to use monetary aggregates. At the same time, the rules for calculating and analyzing money supply and monetary aggregates according to the methodology of the Bank of Russia determine their sequence from the standpoint of decreasing liquidity, which corresponds to the banking practice of other countries (Golikova & Khokhlenkova, 2000).

As shown in Figure 01 , the principle of constructing monetary aggregates is based on the fact that each previous indicator of the money supply is included in the next. Cash in circulation (money aggregate М 0) is an absolutely liquid part of the money supply that can be immediately used as a means of payment and consists of banknotes and coins in circulation (money outside banks).

Figure 1: Russian monetary aggregates
Russian monetary aggregates
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Russian practice of the formation of monetary aggregates for the period 2011–2018 shown in figure 02 .

Figure 2: Dynamics of monetary aggregates in the Russian Federation, billion rubles (Official website of the Bank of Russia)
Dynamics of monetary aggregates in the Russian Federation, billion rubles (Official website of the Bank of Russia)
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So, according to figure 02 , the amount of cash ( М 0) has a tendency to increase, while the growth rate over 8 years amounted to 57.3 %. The highest growth rate compared to the previous year is 110.6 % and recorded in 2018. The lowest level is 0.9 % in 2015.

In general, the М 1 money aggregate also tended to grow and amounted to 169.5 % in 2018 compared to 2011, while in 2014 the growth of the indicator compared to 2013 was negative and amounted to 1.1 %, and the maximum growth for 2011–2018 was observed in 2013, when the growth rate in relation to 2012 was 13.3 %.

The М 2 aggregate grew to 194.6 % for the period 2011–2018, while the highest growth rate compared to the previous year was recorded in 2013 and amounted to 14.7 %, and the lowest was in 2016 and amounted to 9.2 %.

The М 0 aggregate represents all cash and maximum liquid assets that can be used as a means of circulation and payment. This indicator is usually chosen as the object of monetary regulation, when the prevailing share in payment relations is cash, and the economy is in a “liquid trap” and does not respond to changes in interest rates (Khokhlova, Kretova, & Burov, 2019; Muftahova, Nechaev, & Antipina, 2015).

The М 1 aggregate covers a larger volume of means of payment than the monetary base and includes the М 0 aggregate and funds in settlement, current accounts and demand deposits.

Unlike the М 1 aggregate, the М 2 monetary aggregate is the leading one from the position of monetary regulation in the financial markets, where the behavior of economic entities depends, as a rule, on the level of interest rates (Makarevich, 2003; Tayurskaya, Okladnikova, & Bibarsov, 2019; Tyapkina, Ilina, & Mongush, 2016).

Practice has established that the М 0 aggregate is most sensitive to changes in interest rates and turnover (Tayurskaya, Okladnikova, & Solodova, 2018). М 1 and М 2 are sensitive to changes in the consumer price index and gross domestic product.

The structure of the money supply in the national definition (monetary aggregate M2) is presented in Figure 03 .

Figure 3: Money supply structure in national definition, billion rubles (Official website of the Bank of Russia)
Money supply structure in national definition, billion rubles (Official website of the Bank of Russia)
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Figure 03 shows the following trends characterizing the М 2 money aggregate: the share of cash and transferable deposits decreased from 24.5 and 28.2 % in 2011 to 19.8 and 26.08 % in 2018. At the same time, the share of other deposits of the population, as well as non-financial and financial (except credit) organizations increased from 31.8 and 15.6 % in 2011 to 36.5 and 17.6 % in 2018.

The liquidity of М 2 is lower than the liquidity of М 1, because term deposits and funds in deposits that are able to act as a means of accumulation are included in М 2. These components of the М 2 aggregate have the ability to turn into cash or funds in current accounts for making payments, but not earlier than the specified deposit condition or with prior notice to the bank and with a loss of interest on term deposits and deposits. Therefore, these funds cannot be used in calculations immediately.

The М 3 unit includes М 2 Х , as well as money market instruments in the form of deposit and savings certificates of commercial banks, government loan bonds and bills of exchange.

In addition, the active part, which serves the economic turnover, and the passive part, which includes cash accumulations, are distinguished in the money supply. This gradation of quantitative indicators of the money supply forms such statistical indicators as “money” and “quasi-money”. The “money” aggregate is equal to the indicator М 1, i.e. represents the amount of money outside banks and demand deposits in the banking system that can be used as a means of payment. The “quasi-money” aggregate, which includes deposits of the banking system in rubles and foreign currency, is not called so by chance. These funds cannot be used for sales transactions, and their withdrawal, as noted earlier, is subject to certain conditions. However, they are similar to money in two respects: on the one hand, they can potentially be used to pay off settlement obligations, on the other hand, they help to accumulate money.

The “money” and “quasi-money” aggregates form the “broad money” ( М 2 Х ) aggregate. This monetary indicator is used for monetary regulation in countries where foreign currency is considered not only as a means to pay for foreign economic contracts, but also for the purpose of preserving the savings of the population and reducing losses in inflation income.

When choosing an object of regulation, it is necessary to take into account the ability of the Central Bank to influence the monetary aggregate and monitor its dynamics. In this case, the monetary aggregate should possess some mandatory properties: dynamics close to the dynamics of the general price level, which allows influencing macroeconomic processes; be easily determined for the possibility of the Central Bank affecting the money supply in circulation; to be accessible to the understanding of economic agents in order to provide them with the opportunity to navigate when developing an economic strategy (Khokhlova & Pakholchenko, 2015; Khokholova, Kretova, Kuznetsova, & Tsaregorodtseva, 2017; Vovseenko, 2018).

The М 3 aggregate is not used for the reason that the difference between М 3 and М 2 is tenths of a percent. To assess the state of the aggregate money supply, the dynamics of the money supply and the change in the values of macroeconomic indicators such as gross domestic product, consumer price index, commodity circulation, and average rate on credit investments are usually compared. At the same time, the functional dependence of the money supply and monetary aggregates on these indicators is established.


In Russia, the main monetary aggregate assessing the state of the money supply and representing the object of monetary regulation is indicator М 2.

Therefore, an increase in the share of non-cash funds in the banking system has a positive effect on macroeconomic processes and allows monetary authorities to have a greater impact on their dynamics.

Thus, the money supply not only ensures the implementation of payment relations between business entities, but also is an object of regulation of economic activity. The basis of this process is the change in demand for money, the ratio between the components of the money supply, as well as the implementation of monetary policy measures by the Central Bank.


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