Banking Notes Content
High Power Money
The total amount of currency held by the public, as well as cash in the vaults of financial institutions, and bank deposits at the Federal Reserve. The Federal Reserve Bank maintains close Control over the amount of high powered money that can influence its monetary policy decisions. also called the monetary base.
In simple terms High Powered Money (HPM) is the net or total liability of the monetary authority of any nation……in Nepal it is the liability of NRB.
It is simply the sum of all currency in circulation with the people of the country, cash kept in the commercial bank vaults along with the deposits of govt. of the country and commercial banks. The term liability basically means that when people/govt/commercial banks produce the currency/claims….the NRB has to pay value equal to currency/claim.
The NRB uses this H.P.M. for regulation of money supply in the economy. By controlling the money supply NRB regulates (i.e tries to regulate) the inflation in eco.
NRB uses the H.P.M for the process of money creation. Money creation will increase the supply of money in eco.
When NRB needs to pump extra money in eco. it injects a certain amount of high powered money (Say H) into the economy (by the purchase of govt bonds/assets etc).
NRB may purchase government bond worth 500 million. Then, total money supply will not only increase by 500 million but it goes on multiplying.
This money injected into the economy through purchase of government bonds and so on will increase the total money supply. But the actual amount increase will not be determined
This money injected into the economy through purchase of government bonds and so on will increase the total money supply.
But the actual amount increase will not be determined
NRB may purchase government bond worth 500 million. Then, total money supply will not only increase by 500 million but it goes on multiplying
This increased addition of money supply (over the injected value of H) is due to the factor called Money Multiplier!
Mathematical relationship between the monetary base and money supply of an economy. It explains the increase in the amount of cash in circulation generated by the banks’ ability to lend money out of their depositors’ funds. When a bank makes a loan, it ‘creates’ money because the loan becomes a new deposit from which the borrower can withdraw cash to spend. This money-creating power is based on the fractional reserve system under which banks are required to keep at hand only a portion (between 10 to 15 percent, typically 12 percent) of the depositors’ funds. The rest may be converted into loans, thereby increasing the available cash by a factor that is a multiple of the initial deposit.
Monetary multiplier means the influence a central bank has over the money supply by altering the required banking reserve rate.
Compiled and collected by
Krishna Prasad Aryal
Assistant Branch Manager
Rastriya Banijya Bank
Branch Office Parasi