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money stock M0 or
Money stock M1, M2, M3.
Reserves which banks
must hold in the form of coins, banknotes or
sight deposit accounts. The National Bank
Act stipulates that banks hold a certain fraction
of their liabilities (including sight, time and savings deposits)
in reserves. Bank reserves held at the Swiss National Bank in
the form of sight deposit accounts play a pivotal role in
managing the money supply
(sight deposits, liquidity).
The sum of banknote circulation and banks' sight deposits at the National Bank (money stock M0 ).
Monetary policy refers to those measures with which the central banks influence interest rates on the money market and hence their country's money supply. Most central banks, including the Swiss National Bank, nowadays try to modulate their country's money supply in such a way as to maintain the highest possible degree of price stability and to enable the economy to fulfil its growth potential.
The transactions whereby the central banks influence the relative scarcity of money and the level of interest rates on the money market are known as monetary policy instruments. The National Bank's most important monetary policy instrument is known as the repo. Other instruments are the foreign exchange swap
and the liquidity-shortage financing facility (special-rate repo transactions).
See price stability.
Money is the medium of payment or exchange accepted by the public. It also serves as a store of value and an accounting unit. Money can take many different forms. If it is to enjoy public confidence, it needs to be suitably scarce (monetary policy).
The banks create new money by granting loans. Their scope for creating money is affected by the statutory requirements concerning
minimum reserves and by the National Bank's readiness to increase or tighten the money supply.
The money market is the market on which loans and balances with a short maturity period (one day to twelve months) are traded. Funds with longer maturities are traded on the capital market. The money market is mainly used for settling liquidity differences between banks (liquidity). The central banks and the banks are among the main operators on the money market.
The money stock M0 is the money created by the central bank. Referred to in Switzerland as the monetary base, it consists of banknote circulation and the banks' sight deposits at the National Bank. The National Bank has a direct influence on this money supply aggregate.
Alongside the monetary base (M0), the Swiss National Bank recognises three other monetary aggregates, namely M1, M2 and M3. The M1 aggregate is money that can be used at any time as a means of payment, i.e. cash in circulation and Swiss franc sight deposits held at banks and the post office. M2 consists of M1 plus Swiss franc savings deposits.
Savings deposits can be easily and quickly converted into cash, subject to a withdrawal limit. M3 consists of M2 plus Swiss franc term deposits (time deposits). Unlike the monetary base, M1, M2 and M3 consist mainly of money which the banks have created (money creation).
For the economy to function it needs to be supplied with money. The money supply must be neither too abundant nor too tight, since otherwise there is a risk of inflation or deflation (monetary policy). The money supply is steered via the banking system. The National Bank supplies the banks with money or liquidity through the application of its monetary policy instruments. The money flows from the banking system to the rest of the economy, a process in which money creation by the banks plays a central role.
The total quantity of payment instruments in a given currency can be defined in different ways. Depending on the speed at which various forms of money can be used for payments, they are described as money stock M0, M1, M2 or M3.
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