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Broad Money of Republic of Moldova

(analysis of the last 5 years)

Autor: Alina Druta


Group: FB159

Broad Money of Republic of Moldova


(analysis of the last 5 years)

Autor: Alina Druta


Teacher: S. Ciobu

Academy of Economic Studies from Moldova (ASEM)


Faculty: Finance
Course: Money and credit
Group: FB159
2
Content
Introduction..4
Structure of broad money......5
Components of broad money.5
Concept of money aggregates5
Concept of monetary policy..7
Monetary policys objectives.7
Instruments of monetary policy...10
Analysis.12
Opinion..20
Bibliography.21
Annexes.21

3
Introduction
In Republic of Moldova, the possibility to measure broad money
appeared when was introduced national currency in 1993. The first
methodology was consisted of 8 components of broad money grouped
in 5 aggregates.
In time, was considered that some assets, which were included in
broad money, in autochthonous conditions didnt attained the
liquidity degree characteristic for mean of payment accepted in
transactions. On the other hand, there were technical difficulties in
accounting and evidence of some assets claimed components of broad
money. For perfecting these problems, BNM changed the methodology
of broad moneys calculation, giving it a new structure which is
available till now.
Broad money applies to definitions such as M2, which includes
building society deposits, or M3 which includes interest-bearing bank

deposits. It does not apply to M0 or M1. Broad money measures of the


money supply tend to be less stable relative to GDP than more narrow
measures.
Broad Money represent all the existing liquid assets at a certain time
or period into a countrys economy.
Whence we understand the notion of liquidity as the ability of using a
financial asset according to the means of payment.
The concept of broad money evolved from one period to another
depending on the degree of knowledge of the monetary phenomenon,
as well as the economy in general. Thus, a long while, was considered
that broad money are composed from full currency. Then, in its
structure were included banknotes and treasury notes. Later, it
included also money account. And in present, broad money represent
an aggregation of monetary means.

4
Structure of broad money
In broad money structure, could be included the next asset:
Actual currency is the real total of money in the form of principal
and divisional currency situated in circulation after its issuance by
monetary authorities. Actual currency is also named cash. It is the
most liquid component and the element with a big importance for
broad money.
Currency account are funds available on current accounts or
deposits. In present, currency account represent the main
component of broad money. Also, currency account execute the
function of reserving value.

Term deposits are a type of bank deposits, by which customers


entrust money to the bank, up to an agreed period, at an interest
rate. So, this financial asset has the connotation of investment
instruments.
Other financial assets. In broad money are included also assets
which are placed in different titles, issued and putted into
circulation on the financial market, each having different degrees
of liquidity. The titles included in broad money have different
emission term (short, medium, long). To those with short term
refers bill of exchange, treasury notes, cash receipts, which have a
higher degree of liquidity then those with medium or long term
(shares, bonds etc.).
Components of broad money
Components of broad money are:
- Cash itself which is characterized with perfect liquidity.
- Availability quasi-monetary those instruments which can be
transformed into liquid money or can fulfill its functions.
Concept of money aggregates
As we know, broad money is created by monetary aggregates.
5
Monetary aggregates represent a set of monetary assets with
different structure and content which serves as a measure of fractions
or of total broad money.
First type of assets are cash the sum of paper money and of
divisional currency issued into circulation. This kind of assets have
perfect liquidity. They can be used freely by the legal and natural
persons. This indicator is noted with the symbol C (cash).

First aggregate M1, many years played the role of the dominant
quantity surveyor of the broad money, it include 2 types of liquid
assets real money, in cash (the indicator C) and sight deposits. Their
liquidity is not perfect.
Sight deposit is a bank deposit that can be withdrawn immediately
without notice or penalty.
The second aggregate M2, include aggregate M1 and a set of financial
assets which comes from the moneys capacity to be a liquid mean of
purchasing power. Among the most popular assets from this category,
are term deposits and instruments of money market.
Term deposits are cash deposits which are holded in banking
institutions for a certain period of time strictly established. The access
to this money is permitted only after expiration of maturity.
The third aggregate M3, include the aggregate M2 and a set of
financial assets which comes from the moneys capacity to be an
efficient mean of investments. This set of financial assets include
foreign currency and instruments of financial market.
The components of money aggregates in Republic of Moldova:
Money into circulation (M0)
Sight deposits

M1

Total

Term deposits
Instruments of money market
Total

M2

Deposits in foreign currency


Instruments of financial market

Total

Concept of monetary policy


Monetary policy represent the actions of a central bank, currency
broad or other regulatory committee that determine the size and rate
of growth of the money supply, which in turn affects interest rates.
Monetary policy is maintained through actions such as modifying the
interest rate, buying or selling government bonds, and changing the
amount of money banks are required to keep in the vault (bank
reserves).
Monetary policys objectives
Monetary policys objectives can be represented as follow:
Operational objectives -> Intermediary objectives -> Final
objectives
Final objectives are:
- Price stabilization
represent the fundamental objective of monetary policy. Monetary
authority is responsible for attaining price stabilization. It refers to the
general price level in economy and involve avoidance of prolonged
inflation and deflation.
Price stabilization enables individuals to recognize the variation of the
7

level of the relative price. This offers to entities and consumers the
possibility to be more informed in taking decisions about investments
and consumptions, contributing to an effective market. This objective
is also contributing to financial stabilization, because it removes
malfunctions and uncertainties which appeared at the level of the
market as a result of price instability.
- Sustainable economic growth
is a process which is developed in long-term. A reformulation of the
objective would be: limiting the economys cyclical oscillations, in a
way that will ensure a sustained and balanced economic growth.
- Employment
represent the insurance of a safe workplace for each citizen.
Employment means the achievement of a healthy economy. Much
more, this objective means the development of the public sector.
- balance of payments
Appreciation or depreciation of the national currency, affects in direct
the balance of payment and currency reserve and their conditions
depends on the situation of commercial balance determined by
exchange rate of national currency.
Monetary policy in the context of the equilibrium of the balance of
payments, has as target the liquidation of the negative balance.
Intermediary objectives should:
- be influenced and controlled by monetary authorities,
- influence on the final objectives,
- be measured.
Intermediary objectives are:

- The optimal level of money supply


Measurement indicators of the optimal level of money supply are:
8
increasing the monetary base; increasing of monetary aggregates;
increasing of the volume of credits; increasing of the volume of
deposits; etc. Achievement of this indicators materializes in the control
actions of the growth of the money supply in relation with the growth
rates and increasing production volume and services.
- The incentive of interest rate
is the size of the interest rate of the credits and bank deposits at a
certain level, contributory, on the one hand, on the establishment of
the economies, and on the other hand, on the stimulation of the
investments in the real economy.
- The favorable level of exchange rate
is the size of of the exchange rate of the national currency, in
correlation with purchasing power parity (PPP). Overvaluation or
underestimation of the national currency unbalance the balance of
payments. Overpricing of the exchange rate causes overconsumption
currency. In this way, the favorable level of exchange rate objective is
training the equilibrium of the balance of payments.
Operational objectives are:
Appropriate level of monetary base
is described by the growth indicator of the monetary base upon the
whole and by its components in a certain period of time. Monetary
base include the aggregate M0 and financial means in bank accounts
form Central Bank and the minimum obligatory reserves. This

objective directs economic developments in the meaning and


parameters contemplated.
Reasonable level of bank liabilities
consist in the growth of bank liabilities in a certain period of time.
The liabilities influence the banks excess reserves which can be free
used by these for the increase of assets in different types: credits,
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investment in titles, etc.
Circumspect structure of bank assets
is determined by the indicator changing of the structure of bank
assets in a certain period of time. Achievement of this objective, will
involve level and structure changes of the assets portfolio.
Incentive level of interest rates on interbank loans
is the interest rate which is negotiated on the money market at short
term loans between banks with in order to maintain the liquidity.
Instruments of monetary policy
There are two types of instruments:
Direct instruments of monetary policy
1. Instruments of inflow and outflow of money from the market:
a. Credits granted to banks
Central Bank can manage the volume of granted loans through
limitation or extension. This will shrink the volume of bank liquidity
and will inhibit the extension of broad money.
b. Credits granted to government

Can produce similar effects as handling volume of operations of


rediscounted bills and credits granted to banks.
c. Credits granted through the discount operations.
2. To influence the asstets and liabilities
a. Bank credits
Central Bank can apply capping which is manifested in the form of
institutions through which banks are informed considering the
maximum volume of loans which can be granted.
10
Advantages:
-

It is easy to applied and implemented,


Increased efficiency,
The possibility of controlling monetary aggregates and credits,
It is neutral in relation to the exchange rate regime.

Disadvantages:
- Restricts the competition between banks and prevent the
development of money market,
- Produce effects that occurs over a long period of time,
- Generates lower bank revenues,
- Leads to multiplication of direct bank controls.
b. Bank deposits
c. Current liquidity
Enforce the banks to maintain an amount of the total deposits in the
form of liquid assets.
d. Instruments of money market

Is supervising the volume of instruments of money market issued by


bancks.
3. Control of foreign currency of operations
a. Exchange operations
Central Bank is setting the exchange rate of national currency, is
supervising the activities of currency exchange rate house, etc.
b. Interest rate for nonresidents
Is supervising the extension of foreign currency which is circulating
in a countrys economy.
c. Restrictions for the interest, deposits for nonresidetnt
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Is supervising the methodology of payment of the interest rate.
Indirect instruments of monetary policy
1. Inflow and outflow of money circulation
a. Open market operations
Represent the purchase/sale of the government issued titles on the
secondary market (Lombard and repo).
2. The influence of assets and liabilities
a. Interest rate of the credits of the Central Bank
b. The rate of minimum of obligatory reserves
Represent the percentage of the bank liabilities which should be kept
at Central Bank
3. Control of foreign currency operations

a. Interventions of the Central Bank on the currency market


Represent the operations of sale-purchase of convertible currency to
maintain the exchange rate at one time.
Analysis
Money aggregates from Republic of Moldova (period 2010-2015)
M3
M2

Foreign

Year

currenc

Total

(mil.

(mil.

lei)

lei)

M1
Money

Instruments

into

Sight

circulatio

deposit
s

n
(mil. lei)

(mil.

Term

of money

Total

deposit

market

Total

(mil.

(mil. lei)

(mil.

lei)

lei)
201

10107,6

5612,6

201

10864,5

6521,1

lei)
15720,

9049,3

1,3

17385,

13240,8

7366,5

20607,

10879,3

0,5

9569,3

27119,
8

12280,5

37051,

28265,

12711,7

14307,2

0,1

17550,5

24770,
7

201

lei)

201

(mil.

34914,

14598,6

17997,4

45117,
1

40977,

49513,
2

17514,4

62631,
5

As we see, all the components of the structure of broad money are


stable rising from 2010 till 2012, excepting instruments of money
market which are decreasing till 0 in 2012.
Components of broad money in 2012:

In July 2012 the monetary base increased by 532,9 mil. lei (3%)
versus June 2012 and constituted 18113,1 mil. lei. The growth of the
monetary base was determined by the positive evolution of the net
foreign assets of the National Bank, which increased by 944,8 mil. lei
(4,6%). Meanwhile net domestic assets decreased by 411,9 mil. lei
(14,4%).
Money into circulation (M0) increased from 11243,9 mil. lei in June
2012 to 11760,9 mil. lei in July 2012.
Broad money M2 during the reporting period increased by 1151,7
mil. lei or by 3,9% compared to June 2012, and constituted 30692,8
mil. lei. At the same time, broad money M3, in July 2012 increased by
1546,7 mil. lei.
Analysis of passive components of broad money (M3) shows that its
increase was determined by the upward evolution of its components,
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reflecting the increase of money in circulation with 1029.7 mil. lei and
the and monetary aggregate (M0) - to 517.0 mil. lei versus precedence
month.
The balance of deposits in national currency constituted 18931.8 mil.
lei, whose share made up 57.4% of total balance of deposits, and the
deposits in foreign currency - 14060.0 mil. lei (with a share of 42.6%)
The structure of deposits in 2012:

The broad money growth during July 2012 was due to the upward
evolution of its components, the growth of net foreign assets of the
banking system by 1251.3 mil. lei (6.9%) and net domestic assets - by
295.4 mil. lei (1.2%) compared to the previous month.
The balance of credits in economy in July 2012 increased by 852.0
mil. lei (2.6%) versus the previous month due to the increase in
requests to the economy (by MDL) 407.8 mil. lei (2.2%) and in foreign
currency (expressed in MDL) - by 444.2 mil. lei (3.1%).
Structure of demand to economy in 2012:

14

During the reference period total balance of demand to economy in


foreign currency (expressed in MDL) increased by 444.2 mil. lei (3.1%)
due to increasing balance of demand to state entities, to other
organizations which are performing certain financial operations and to
the private sector, with 6.5 million. lei, while the balance of demand to
individuals decreased by 13.3 mil. lei.

Components of broad money in 2013:

15
In December 2013 the monetary base increased by 1182.1 mil. lei
(4.7%) versus November 2013 and constituted 26077.7 mil. lei. The
growth of monetary base was determined by the positive evolution of
the net foreign assets of the National Bank, which increased by 1199.5
mil. lei. At the same time, net foreign assets decreased by 17.4 mil. lei.
Money into circulation (M0) increased from 16,937.9 mil. lei in
November 2013 to 17550.5 mil. lei in December 2013.
Broad money M2 during the reporting period increased by 1789.8
mil. lei, or 4.1% compared to November 2013 and constituted 45117.1
mil. lei.
At the same time, broad money M3 in December 2013 increased with
1923,7 mil. lei (3.2%).
Analysis of passive components of broad money (M3) highlights that
its increase was determined by the upward evolution of its
components, reflecting the increase of money in circulation with 612.6
mil. lei and the total balance of deposits with 1311.1 mil. lei versus
the previous month.

The balance of deposits in national currency constituted 27566.7 mil.


lei, whose share made up 61.2% of total balance of deposits, and the
deposits in foreign currency 17514.4 mil. lei (with a share of 38.8%).
The structure of deposits in 2013:

16

The broad money growth during the reference period was due to the
upward evolution of its components, the growth of net domestic assets
of the banking system by 2559.8 mil. lei (9.0%) and net foreign assets
decreased by 636.1 mil. lei (2.0%).

The balance of credits in economy in December 2013 increased by


1150.9 mil. lei (4.8%) and in foreign currency (expressed in MDL) - by
297.0 mil. lei (1.7%).
During the reference period total balance of demand to economy in
foreign currency (expressed in MDL) increased by 9.3 mil. lei (1.1%)
due to increasing balance of demand to state entities, to other
organizations which are performing certain financial operations and to
the private sector, with 294.2 million. lei, while the balance of demand
to individuals decreased by 24.6 mil. lei (7.3%).
Structure of demand to economy in 2013:

17

Components of broad money in 2014:

In August 2014 the monetary base decreased by 420.6 mil. lei (1.6%)
compared to July 2014 and constituted 26616.9 mil. lei. The decrease
of monetary base was determined by the negative evolution of the net
domestic assets with 1235.0 mil. lei (27.4%). At the same time, net
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foreign assets increased by 814.4 mil. lei (2.6%).
Broad money M2 during the reference period decreased with 367.7
mil. lei, or by 0.8% compared to July 2014 and constituted 44996.6
mil. lei.
At the same time, broad money M3 in August 2014 decreased by
130.4 mil. lei (0.2%).
Analysis of passive components of broad money (M3) indicates that
decrease was driven by the decrease of monetary aggregate balance
cash in circulation (M0) - 148.5 mil. lei, while the total balance of
deposits increased by 18.0 mil. lei in August.
Components of broad money in 2015:

In August 2015 the monetary base increased by 1238.1 mil. lei (4.5%)
compared to July 2015 and constituted 28718.4 mil. lei. The increase
of monetary base was determined by the positive evolution of the net
domestic assets with 1561.0 mil. lei (6.0%). At the same time, net
foreign assets decreased by 323.0 mil. lei (23.3%).
Broad money M2 during the reference period increased with 277.8
mil. lei, or by 0.7% compared to July 2015 and constituted 40189.6
mil. lei.
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At the same time, broad money M3 in August 2015 increased by 11.7
mil. lei (0.02%).
Analysis of passive components of broad money (M3) indicates that
increase was driven by the increase of monetary aggregate balance
cash in circulation (M0) 623.2 mil. lei, while the total balance of
deposits decreased by 611.4 mil. lei in August.

Opinion
Broad money has an influence on the national economy contributing
positively to the economic growth. Thus, a prerequisite for boosting

economic growth above 5% annual average stock of broad money


(monetary aggregate M3) should increase at least 16% (in real terms).
The grade of monetization of the economy is suitable for the
development of the Republic of Moldova. A certain optimal level of
monetization could not be detected - in fact, a higher level of GDP is
associated with a high degree of monetization of the economy.
On the other hand, money seems to contribute significantly to
inflation. Such a state is characteristic for countries with low
economic performance. In Moldova, an important influence on the
prices have the variables that reflect structural weaknesses of the
economy, such as:
- low productivity in sectors of national economy;
- ineffective management of state enterprises or lack of an
authentic competition space;
- the movement in prices for energy
- adverse weather developments which may affect the supply of
agricultural products.
This conclusion makes us to understand the importance of broad
money into a countrys economy.

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Bibliography
-

O. Stratulat, Moneda si Credit, Volumul I si II, ASEM.


J. Black, Dictionary of Economics, Oxford
http://www.bnm.md
http://www.statistica.md/
http://asm.md/

Annexes
Annex 1

Quarterly evolution of monetary aggregates and GDP (period


2003-2010)

Annex 2

Annual data on the evolution of GDP deflator, GDP and monetary


aggregate M3

22
Annex 3

Results of estimation for regression that reflects the connection


between economic growth and increase money supply

23