To understand exactly the meaning of monetary base, we must first analyze each of the terms that make up the expression. Is called base to the support, foundation or foundation of something, whether physical or symbolic. Monetary, for its part, is that linked to currency (legal tender).
From these definitions, it is easier to understand what is the monetary base. This is how the sum of the money that is in circulation among the people and of the reserves that the banking entities maintain in the central bank of a country.
It can be said that the monetary base is formed by the legal money that emits the central bank, which is distributed between the banks’ cash and circulating cash. Control of the monetary base depends on the central bank itself, which through its interventions can regulate the nation’s money supply.
The central bank, which has a monopoly on printing money, manages the monetary base by buying and selling public debt securities. You can also modify the interest rates and the coefficients of bank reserves so that there is more or less money in circulation.
Exactly we can establish that the monetary base can be increased by undertaking actions such as acquiring public debt securities by the Central Bank, increasing credit to private banks or through exports.
It is known as monetary politics the set of decisions and measures that alter the monetary base and other elements that are directly linked to the stability of the economy. If the objective is for the monetary base to grow, a expansionary monetary policy. When the intention is to reduce said monetary base, a restrictive monetary policy.
In addition to what has been indicated, we have to state that the monetary policy of a country will be established as an end to be able to achieve economic stability in it. Specifically, the objectives of the aforementioned will be the following:
-To avoid that imbalances may occur in terms of the balance of payments.
-Of course, you will also bet on achieving a remarkable stability of the value of money.
Likewise, it should not be overlooked that monetary policy will also be aimed at achieving the highest level of employment that is possible.
On many occasions, what is the monetary base is often confused with the money supply. And that should not occur because they are two different things. Thus, in order to understand what makes them different, we can establish the following:
-The money supply, on the one hand, is the amount of money available that exists in an economy. Exactly we are referring to the money that comes from bank deposits, to the cash in the hands of the public …
-The monetary base, on the other hand, is the figure that the economic authorities come to control. As we have mentioned, it is the sum of the amount of cash that is in the hands of the public plus what are the bank reserves.