This Bulletin article describes the monetary base, explains how broad money is created through the bank lending process, and explains the constraints on broad money creation.
The Reserve Bank of New Zealand is responsible for maintaining people’s trust in money. Trust and credibility are central to the idea of money, without which, the economy could not run smoothly and people would be much worse off. The Reserve Bank tries to keep the purchasing power of money steady by keeping consumer price inflation low and stable.
There are several forms of money. Some are created by the Reserve Bank directly, and others are created by commercial banks via interactions with their customers.
Money created by the Reserve Bank directly is known as the , base money or M0. The monetary base includes:
- physical currency (notes and coins)
- balances.
Settlement cash balances are deposits held by commercial banks in their accounts at the Reserve Bank.
However, the monetary base is small relative to the total money supply. The money most people use in their daily lives is known as or M2. Bank deposits make up about 98% of broad money in the New Zealand economy.
The Reserve Bank conducts monetary policy by influencing
short-term interest rates to maintain price stability and support maximum
sustainable employment. The Reserve Bank’s monetary policy influences the quantity of broad money, but does not directly
control it.
The final section of this Bulletin explains how additional monetary policy
(AMP) tools affect the quantities of base money and broad money.
About the Bulletin
The Reserve Bank Bulletin canvasses a wide range of issues related to central banking, the financial system and the New Zealand economy.
Our role in money and payments is multi-faceted. First, we oversee, operate, regulate, and supervise core payment systems. Secondly, as a steward of money and cash our responsibilities lie not only in the issuance of central bank money but also in the roles that it performs. Through these systems, New Zealanders are able to save and spend their money, manage risks, and together grow the economy and make life better.
This Bulletin goes into more detail on the mechanics of how money is created and by whom.
It also explains how the money supply fits in with monetary policy, our key role to control inflation and support employment.
More information
Commentary on monetary policy’s contribution to recent economic outcomes can be found in our recently published Review and Assessment of the Formulation and Implementation of Monetary Policy.
The monetary base is made up of settlement cash and physical currency in circulation. Settlement cash can only be held by registered banks with accounts in the Reserve Bank’s (ESAS). ESAS forms an integral part of how payments are made and settled in New Zealand, which is discussed further in New Zealand’s payment landscape: a primer. Only ESAS account holders can hold, borrow and lend settlement cash; it cannot be ‘lent out’ to the general public.
