Money, Financial Intermediation and Governance
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Money, Financial Intermediation and Governance

Dino Falaschetti and Michael J. Orlando

Dino Falaschetti and Michael Orlando unify the treatment of the many deeply related topics in money and banking in this wide-ranging book. By continually building on the assumption that economic actors are maximizers, they explain how monetary and financial services, as well as related governance mechanisms, influence economic performance. In this manner, Money, Financial Intermediation and Governance not only lets readers make sense of today’s monetary authorities and financial markets, it lets them see through superficial complexities to the fundamental influences that will shape those organizations for years to come.
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Chapter 10: Measuring Monetary Services

Dino Falaschetti and Michael J. Orlando


INTRODUCTION Before we can contemplate how monetary authorities are and should be organized, we should understand how to measure (one of) their output(s) – that is, transactions services. We’ll address this issue by arguing that exchange media should be counted as ‘money’ only to the extent that they contribute to an economy’s stock of transactions services. This method of counting differs from more common ‘simple sum’ methods that implicitly treat different forms of money as equally contributing to an economy’s production of exchange services. SIMPLE SUM MEASURES To measure an economy’s stock of monetary services, authorities tend to use ‘simple sum’ indexes. As their name suggests, these measures add, one for one, the units of exchange media circulating in an economy during a particular point in time. For example, the United States’ Federal Reserve System measures the US money supply at three levels – that is, M1, M2 and M3. Each level, moving from M1 to M3, progressively includes less liquid forms of money. In particular:1 ● ● ● M1 includes ‘currency in the hands of the public, travelers’ checks, demand deposits, and other deposits against which checks can be written’; M2 includes M1 plus ‘savings accounts, time deposits of under $100 000, and balances in retail money market mutual funds’; and M3 includes M2 plus ‘large-denomination ($100 000 or more) time deposits, balances in institutional money funds, repurchase liabilities issued by depository institutions, and Eurodollars held by US residents at foreign branches of US banks and at all banks in...

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