The Monetary Financial System Visually Explained
Money & Macro・2 minutes read
The Hierarchy of Money framework categorizes money into core, periphery, and financial crust, explaining the different forms of money and their roles in the economy. It clarifies the relationship between central bank money, private bank money, and non-bank financial instruments, facilitating discussions on monetary economics.
Insights
- The Hierarchy of Money categorizes monetary forms into core, periphery, and crust, clarifying the central bank's role in issuing core money and banks' creation of periphery money through lending.
- This framework facilitates discussions on complex monetary topics like quantitative easing and gold's role in the economy by highlighting the distinctions between core money, periphery money, and non-bank financial instruments in the financial system.
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Recent questions
What is the Hierarchy of Money?
The Hierarchy of Money is a framework that explains the monetary system of any country, emphasizing that some forms of money are superior to others. It consists of the monetary core, monetary periphery, and financial crust, each playing a distinct role in the economy.
What comprises the monetary core?
The monetary core includes bank notes, coins, and central bank reserves issued by the central bank. It forms the foundation of the monetary system and fluctuates daily based on bank borrowing and lending activities.
What is the monetary periphery?
The monetary periphery is built on the core and consists of private bank money like digital accounts. It expands as banks create money through lending, serving as an extension of the core in the monetary system.
What are financial crust instruments?
Financial crust instruments are non-bank financial instruments that are not universally accepted as money but are still essential in the economy. Examples include money market fund accounts and festival coins, resembling money but not part of the core or periphery.
How does understanding the Hierarchy of Money benefit?
Understanding the Hierarchy of Money aids in comprehending the relationship between different forms of money and their roles in the economy. It helps structure discussions on monetary economics, such as money printing, quantitative easing, and the use of gold as money.
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Summary
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Hierarchy of Money: Understanding Monetary Systems
- The Hierarchy of Money is a framework that explains the monetary system of any country, emphasizing that some forms of money are superior to others.
- The monetary core, issued by the central bank, includes bank notes, coins, and central bank reserves, fluctuating daily based on bank borrowing.
- The monetary periphery, built on the core, consists of private bank money like digital accounts, expanding as banks create money through lending.
- The financial crust comprises non-bank financial instruments, not universally accepted as money but still essential in the economy.
- Money market fund accounts and festival coins are examples of financial crust instruments that resemble money but are not part of the core or periphery.
- The framework helps structure discussions on monetary economics, such as money printing, quantitative easing, and gold as money.
- Understanding the hierarchy of money aids in comprehending the relationship between different forms of money and their roles in the economy.
