The document discusses monetary aggregates and the Egyptian case. It defines reserve money (M0) as composed of currency and bank deposits with the central bank. Counterpart assets of reserve money include net foreign assets and net domestic assets. For Egypt, data on reserve money and its counterpart assets from 2006-2011 is presented, showing trends in currency, bank deposits, foreign assets, government securities and more.

1. Money, Banking and Financial Markets
Money
Chahir Zaki
FEPS, Cairo University
Second Semester, 2012
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets Second Semester, 2012 1 / 25

2. 1 Definition of Money
2 Functions of Money
3 Evolution of the Payment Systems
4 How to Measure Monetary Aggregates?
5 The Case of Egypt
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets Second Semester, 2012 2 / 25

3. Outline
1 Definition of Money
2 Functions of Money
3 Evolution of the Payment Systems
4 How to Measure Monetary Aggregates?
5 The Case of Egypt
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets Second Semester, 2012 3 / 25

4. Definition of Money
Money is what is being accepted in payment for goods and services and in
payment for debt.
Money vs. currency: Currency is only cash issued by the central bank.
Currency is too narrow a concept for money as other assets can be
used for payment too.
Money versus wealth: Wealth all the collection of pieces of property
that serve to store value. Wealth includes many assets that cannot be
used to make payments and is thus too broad a concept for money.
Money vs. income: Income is a flow of earnings per unit of time, e.g.
salary per month or interest per year. Money, however, is an asset or
a stock the amount of which needs to be measured at a point in time.
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets Second Semester, 2012 4 / 25

5. Outline
1 Definition of Money
2 Functions of Money
3 Evolution of the Payment Systems
4 How to Measure Monetary Aggregates?
5 The Case of Egypt
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets Second Semester, 2012 5 / 25

6. Means of transaction/ medium of exchange
In a barter economy goods are exchanged without using money:
The precondition for this is the “double coincidence of wants” of
transaction partners.
Looking for a suitable transaction partner is time consuming;
The transaction costs are high;
The number of transactions low.
In an economy with a low number of transactions the division of labor
is not well advanced which means that resources are not allocated
efficiently and economic growth is low.
Using money as a medium of exchange:
separates the transaction of good A for good B into 2 independent
transactions good A for money and money for good B.
The need of the double coincidence of wants is eliminated
Transaction costs decrease.
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets Second Semester, 2012 6 / 25

7. Means of transaction/ medium of exchange
Characteristics of a commodity to serve as a medium of exchange:
It must be standardized;
It must be widely accepted;
It must be divisible;
It must be easy to carry;
It must not deteriorate quickly.
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets Second Semester, 2012 7 / 25

8. Unit of account
Money is the num´raire in which all prices in the economy are
e
expressed.
Using a single num´raire enhances transparency and reduces
e
information costs. In the absence of a single num´raire each good
e
would have many prices denominated in different units of accounts.
Example: Assume an economy with 4 goods, A, B, C, and D, but no
money. What is the price of each individual good?
Good A does not have 1 price but 3 relative prices expressed in units of
good B, units of good C or units of good D.
Good B has 2 “new” prices in units of good C or in units of good D.
The third price is just the inverse of the relative price of A measured in
units of B.
Good C has 1 “new” price in units of good D. The other prices are
inverse relative prices of A and B.
Good D has no “new” price. All prices of good D can be determined as
inverse relative prices of A, B, or C.
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets Second Semester, 2012 8 / 25

9. Unit of account
This economy with 4 goods has 6 prices. The same economy using
money would need only 4 prices expressed in money.
More generally a barter economy with N goods needs N(N − 1)/2
relative prices whereas an economy with N goods using money as a
units of account needs only N prices
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets Second Semester, 2012 9 / 25

10. Store of value
Money is a repository of purchasing power over time. Most people do
not wish to spend all their income at the same point in time when
they earn it.
Money competes with other assets to store value. These other assets
include deposits, financial securities, real estate etc.
Compared to money those assets usually pay the owner a positive
interest rate whereas the interest rate of money is 0.
Why then do people wish to store value in the form of money?
Money is the most liquid asset that can be used for purchasing goods
and services and pay debt.
Liquidity is highly desirable. Illiquid assets involve transaction costs
when they are converted into money.
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets Second Semester, 2012 10 / 25

11. Store of value
How well money stores value depends on the rate of inflation.
When there is hyperinflation (more than 50% inflation per month)
money does not store value at all.
People do not accept money for transactions anymore and currency
ceases to fulfil the functions of money.
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets Second Semester, 2012 11 / 25

12. Outline
1 Definition of Money
2 Functions of Money
3 Evolution of the Payment Systems
4 How to Measure Monetary Aggregates?
5 The Case of Egypt
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets Second Semester, 2012 12 / 25

13. Evolution of the Payment Systems
The payments system is the method of conducting transactions in the
economy.
At the early stage of evolution commodity money (gold, silver) was
used for transactions. Problems: High transaction (transport) costs;
growth rate of money supply limited by the pace of extraction of
those precious metals.
At the next stage of evolution was fiat money (in latin “let it be
done”, as such money is established by government as legal tender).
Fiat money is accepted only if there is trust in the issuing authority.
Problems: Fiat money can be easily stolen; transport cost are still
high.
A further development involves the use of checks (instruction for a
bank transfer). Larger amounts can be transferred by means of a
check bringing down transport costs. Loss from theft is reduced.
Problems: Time to bring a check from 1 place to another and to
process a check
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets Second Semester, 2012 13 / 25

14. Evolution of the Payment Systems
Electronic payment is the next step in the evolution of the payment
system. This saves transaction cost significantly; many payments
become real-time transactions. Problem: Sensitive to attacks to
computer systems.
As a further step the development of e-money (money that exists only
in electronic form), smart cards (cards with a restorable payment
chip) or electronic cash (used on the internet to make transactions)
can be seen.
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets Second Semester, 2012 14 / 25

15. Outline
1 Definition of Money
2 Functions of Money
3 Evolution of the Payment Systems
4 How to Measure Monetary Aggregates?
5 The Case of Egypt
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets Second Semester, 2012 15 / 25

16. How to Measure Monetary Aggregates?
Measuring money is a problem because what is money is defined by
peoples behavior.
What is being accepted for payments may change over time; the
proper measure of money would need to reflect this.
Money is measured in monetary aggregates that include different
types of assets characterized by a particularly high level of liquidity.
The central bank of a country defines the monetary aggregates. The
definition varies between countries as people’s behavior differs.
It is important to measure money because money supply is
systematically related to the inflation rate which is an important
target variable of central bank policy.
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets Second Semester, 2012 16 / 25

17. How to Measure Monetary Aggregates? The Egyptian
Case
Reserve Money (MO): Composed of money in circulation outside the
CBE and local currency deposits of banks with the CBE. It is
considered the basis of money in its broader definitions and is also
known as the monetary base or high-powered money.
Money Supply (M1): Composed of money in circulation outside the
banking system, i.e. with the public, and non-government demand
deposits in local currency minus the balances of cheques and drafts
under collection, with all the banking system units
Domestic Liquidity (M2): Composed of money supply (M1) or what
is known as the current means of payment, and quasi-money
(comprising time and savings deposits in local currency and foreign
currency deposits of residents other than government).
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets Second Semester, 2012 17 / 25

18. Outline
1 Definition of Money
2 Functions of Money
3 Evolution of the Payment Systems
4 How to Measure Monetary Aggregates?
5 The Case of Egypt
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets Second Semester, 2012 18 / 25

19. The Case of EgyptReserve Money and Counterpart Assets*
1-
( LE mn )
2006 2007 2008 2009 2010 2010
End of
June June June June June Sept. Oct.
Reserve Money (M0) 116050 134126 169911 175104 203071 216655 210432
Currency in circulation outside the CBE 78604 92174 111412 126268 144253 153079 153037
Banks' deposits in local currency with the CBE 37446 41952 58499 48836 58818 63576 57395
Counterpart Assets of Reserve Money 116050 134126 169911 175104 203071 216655 210432
xx
Net Foreign Assets** 61302 95372 180333 171732 190234 191648 193724
Net Domestic Assets 54748 38754 -10422 3372 12837 25007 16708
++
Net claims on government (A+B-C) 114055 117254 81872 68613 80611 109835 107088
XX
A - Securities 164761 166724 123123 121709 121533 130597 130597
B - Credit facilities 7047 25468 36574 25190 28754 51931 50877
+++
C - Deposits 57753 74938 77825 78286 69676 72693 74386
Net claims on banks 1018 59512 77581 334 29010 56622 55317
Net balancing items -60325 -138012 -169875 -65575 -96784 -141450 -145697
X xx
Unclassified assets and liabilities (net) 34623 31902 12979 17296 4725 -6824 -8421
Open market operations -94948 -169914 -182854 -82871 -101509 -134626 -137276
* Derived from the CBE's balance sheet.
+ Provisional.
Chahir Zaki (FEPS, Cairopublic economic authorities and theBanking and Financial Markets
++ Including University) Money, National Investment Bank. Second Semester, 2012 19 / 25

20. The Case of Egypt * ‫א‬ ‫א‬ ‫א‬ −١
( )
2010 2010 2011
‫א‬ + ‫א‬
Sept. Oct. Nov. Dec. Jan. Feb. Mar. April+
216655 210432 221924 218393 230862 246961 234900 240849 (M0) ‫א‬
153079 153037 155660 153209 154156 177017 175647 175752 ‫א‬ ‫א‬ ‫א א‬ ‫א‬
63576 57395 66264 65184 76706 69944 59253 65097 ‫א‬ ‫א‬ ‫א‬ ‫א א‬
216655 210432 221924 218393 230862 246961 234900 240849 ‫א‬ ‫א‬ ‫א‬
**
191648 193724 194312 198207 193507 184740 167446 154804 ‫א‬ ‫א‬
25007 16708 27612 20186 37355 62221 67454 86045 ‫א‬ ‫א‬
109835 107088 101920 100252 104468 106555 108831 108404 ( − + ) ++ ‫א‬ ‫א‬
130597 130597 130597 130597 130597 130597 130597 130597 ‫− א‬
51931 50877 47529 45862 53070 57386 58985 61209 ‫א‬ −
+++
72693 74386 76206 76207 79199 81428 80751 83402 ‫− א‬
56622 55317 50739 39848 17936 2169 -1287 -856 ‫א‬ ‫א‬
141450 -145697 -125047 -119914 -85049 -46503 -40090 -21503 ‫א א‬ ‫א‬
x
-6824 -8421 -5492 -5011 -1920 -7101 -13542 -14601 ‫א‬ ‫א‬ ‫א‬ ‫א‬
134626 -137276 -119555 -114903 -83129 -39402 -26548 -6902 ‫א‬ ‫א‬
. ‫א‬ ‫א‬ ‫א‬ ‫א‬ *
+ .
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets‫א‬
. ‫א‬ Second ‫ א‬Semester, +2012
‫א‬ ‫א‬ + 20 / 25

21. The Case of 2EgyptSurvey* : Domestic Liquidity and Counterpart Assets
- Banking
( LE mn )
2006 2007 2008 2009 2010 2010 2010
End of
June June June June June Sept. Oct. Nov.
Domestic Liquidity (1+2) (M2) 560356 662688 766664 831211 917459 948172 961244 96325
Money Supply (1) (M1) 109274 131290 170579 182991 214040 220472 222674 22489
Currency in circulation outside the banking system 74239 86860 104656 118146 135209 143799 142783 14505
Demand deposits in local currency** 35035 44430 65923 64845 78831 76673 79891 79837
Quasi-Money (2) 451082 531398 596085 648220 703419 727700 738570 73836
Local currency time & saving deposits ** 314188 377424 436268 481054 545303 569542 576948 58135
Foreign currency demand deposits ** 18534 26917 26581 32050 33901 34013 36321 33542
Foreign currency time & saving deposits ** 118360 127057 133236 135116 124215 124145 125301 12347
Counterpart Assets 560356 662688 766664 831211 917459 948172 961244 96325
x
Net Foreign AssetsXXX 133385 218629 303680 254134 282408 312144 315293 30494
x
Net Domestic Assets 426971 444059 462984 577077 635051 636028 645951 65831
Domestic credit 509532 531314 570953 695326 775268 792347 803678 81390
Net balancing items -82561 -87255 -107969 -118249 -140217 -156319 -157727 -15559
Indicators
xx xx xx
M2 / GDP (%) 90.72 88.98 85.52 79.76 76.04 68.81 69.76 69.90
Foreign currency deposits/ Total deposits (%) 28.16 26.74 24.14 23.44 20.21 19.66 19.75 19.19
xx xx xx
Income velocity of money (GDP / M2) 1.10 1.12 1.17 1.25 1.32 1.45 1.43 1.43
Money multiplier (M2 / M0) 4.83 4.94 4.51 4.75 4.52 4.38 4.57 4.34
* Extracted from the consolidated balance sheet of the banking system.
+ Provisional
Chahir Zaki (FEPS, Cairo University) of the business sector ( public and private ) and the household sector,
** Representing deposits Money, Banking and Financial Markets Second Semester, 2012 21 / 25

22. s
The Case of Egypt ‫א‬ ‫א‬ ‫א‬ ‫*: א‬ ‫א‬ ‫٢−א‬
( )
2010 2010 2011
‫א‬ + ‫א‬
Sept. Oct. Nov. Dec. Jan. Feb. Mar. April+
948172 961244 963255 973962 969712 982547 988076 986760 ( M2 ) (٢+١) ‫א‬ ‫א‬
220472 222674 224890 223456 229528 239401 240814 241863 (M1) (١) ‫א‬ ‫א‬
143799 142783 145053 143633 145857 161818 163489 165003 ‫א‬ ‫א‬ ‫א א‬ ‫א‬
76673 79891 79837 79823 83671 77583 77325 76860
**
‫א‬ ‫א א א‬
727700 738570 738365 750506 740184 743146 747262 744897 (٢) ‫א‬
569542 576948 581350 592451 579119 568572 567394 566259
**
‫א‬ ‫א‬ ‫א א‬
34013 36321 33542 34072 38134 45829 46257 44613
**
‫א‬ ‫א א א‬
124145 125301 123473 123983 122931 128745 133611 134025
**
‫א‬ ‫א‬ ‫א א‬
948172 961244 963255 973962 969712 982547 988076 986760 ‫א‬ ‫א‬ ‫א‬
312144 315293 304944 305252 286196 274549 266036 256212
XXX
‫א‬ ‫א‬
636028 645951 658311 668710 683516 707998 722040 730548 ‫א‬ ‫א‬
792347 803678 813903 805057 814739 851595 870469 879024 ‫א‬ ‫א‬
-156319 -157727 -155592 -136347 -131223 -143597 -148429 -148476 ‫א א‬ ‫א‬
‫א‬
xx
68.81 xx
69.76 xx
69.90 xx
70.68 xx
70.37 xx
71.30 xx
71.70 xx
71.61 (٪) ‫א‬ ‫/א א‬ ‫א‬ ‫א‬
19.66 19.75 19.19 19.04 19.55 21.27 21.81 21.74 (٪) ‫א א‬ / ‫א‬ ‫א א‬
xx
1.45 xx
1.43 xx
1.43 xx
1.41 xx
1.42 xx
1.40 xx
1.39 xx
1.40 ( ‫א‬ ‫/א‬ ‫א‬ ‫)א א‬ ‫א‬ ‫א‬
4.38 4.57 4.34 4.46 4.20 3.98 4.21 4.10 (M2 / M0) ‫א‬
. ‫א‬ ‫א‬ ‫א א א‬ *
. +
. ‫א א‬ ‫א‬ ‫א‬ ‫א א‬ ‫א‬ ‫א‬ ‫( א‬ ‫א‬ ‫)א‬
** ‫א‬ ‫א‬
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets Second Semester, 2012 22 / 25

23. The Case of Egypt
Main Macroeconomic Indicators
%
2006 2007 2008 2009 2010 2010
End of *
June June June June June Sept. Oct.
Financial & Monetary Sector
Growth rate of reserve money (M0) 14.8 15.6 26.7 3.1 16.0 13.1 12.2
Growth rate of money supply (M1) 21.8 20.1 29.9 7.3 17.0 14.4 15.6
Domestic liquidity growth rate (M2) 13.5 18.3 15.7 8.4 10.4 11.8 13.4
Money multiplier (M2 / M0) 4.83 4.94 4.51 4.75 4.52 4.38 4.57
Currency in circulation / money supply 67.9 66.2 61.4 64.6 63.2 65.2 64.1
*** ***
M2/GDP 90.72 88.98 85.52 79.76 76.04 68.81 69.76
*** ***
Income velocity of money (GDP/M2) 1.10 1.12 1.17 1.25 1.32 1.45 1.43
Growth rate of domestic liquidity in local currency 13.6 20.1 19.3 9.4 14.4 15.1 15.9
*** ***
M2 in local currency /GDP 68.55 68.30 67.69 63.72 62.9 57.33 58.03
Total deposits growth rate 12.8 18.5 15.00 7.71 9.70 11.67 13.40
Household deposits/ total deposits 78.2 73.0 67.6 72.1 73.5 73.5 73.1
Growth rate of local currency deposits 12.8 20.8 19.0 8.7 14.3 15.6 16.5
Household local currency deposits/ total local currency deposits 82.5 76.3 70.5 75.8 76.6 76.6 76.3
Foreign currency deposits /total deposits 28.16 26.74 24.14 23.44 20.21 19.66 19.75
Foreign currency deposits growth rate 13.0 12.5 3.8 4.6 -5.4 -2.0 2.3
Household foreign currency deposits / total foreign currency deposits 67.3 63.9 58.6 59.9 61.3 60.8 59.9
Private business sector credit / total credit 47.0 50.6 51.1 43.8 42.1 41.2 40.9
Net claims on the government / total credit 36.1 33.6 30.5 39.3 42.1 43.1 43.3
Banking density (population in thousand for each banking unit) 24.5 24.2 22.9 22.3 22.3 22.3
*** ***
Note issue /GDP 12.79 12.52 12.54 12.25 12.09 11.26 11.25
Equity /assets** 5.3 4.9 4.9 5.8 6.2 5.9 5.9
Provisions /assets**
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets 5.8
7.2 5.7 6.4
Second5.8 5.7
Semester, 20125.6 23 / 25

24. The Case of Egypt
‫א‬ ‫א א‬ ‫א‬
%
0 2010 2011
‫א‬ + *
Oct. Nov. Dec. Jan. Feb. March April+
‫א‬ ‫א‬ ‫א‬
12.2 16.3 13.1 20.1 32.0 19.8 20.5 (M0) ‫א‬
15.6 13.4 13.4 16.4 19.9 19.3 17.7 ( M1) ‫א‬ ‫א‬
13.4 12.8 12.4 11.8 12.2 11.2 10.8 ( M2) ‫א‬ ‫א‬
4.57 4.34 4.46 4.20 3.98 4.21 4.10 (M2 / M0) ‫א‬
64.1 64.5 64.3 63.5 67.6 67.9 68.2 ‫א‬ ‫א א /א‬ ‫א‬
**
69.76 ***
69.90 ***
70.68 ***
70.37 ***
71.30 ***
71.70 ***
71.61 ‫א‬ ‫א‬ ‫/א‬ ‫א‬ ‫א‬
***
1.43 ***
1.43 ***
1.41 ***
1.42 ***
1.40 ***
1.39 ***
1.40 ( ‫א‬ ‫/ א‬ ‫א‬ ‫א‬ ‫)א‬ ‫א‬ ‫א‬
15.9 15.5 14.7 13.9 12.7 10.6 10.0 ‫א‬ ‫א‬ ‫א‬
**
58.03
***
58.51
***
59.21
***
58.68
***
58.63
***
58.65
***
58.64 ‫א‬ ‫א‬ ‫/א‬ ‫א‬ ‫א‬ ‫א‬
13.40 13.17 12.25 11.12 9.78 8.54 8.11 ‫א א‬ ‫א‬
73.1 73.4 73.5 74.2 74.2 74.5 75.4 ‫א א‬ / ‫א‬ ‫א א‬
16.5 16.6 15.0 13.5 9.7 7.0 6.4 ‫א‬ ‫א א‬ ‫א‬
76.3 76.4 76.4 77.6 78.5 78.9 79.8 ‫א‬ ‫א א‬ / ‫א‬ ‫א‬ ‫א א‬
19.75 19.19 19.04 19.55 21.27 21.81 21.74 ‫א א‬ / ‫א‬ ‫א א‬
2.3 0.8 2.1 2.2 10.2 14.2 14.9 ‫א‬ ‫א א‬ ‫א‬
59.9 60.6 60.8 60.1 58.5 58.9 59.7 ‫א‬ ‫א א‬ / ‫א‬ ‫א‬ ‫א א‬
40.9 40.6 38.8 38.9 37.7 36.9 36.6 ‫א‬ / ‫א‬ ‫א‬ ‫א‬
43.3 43.7 45.3 45.3 47.2 48.1 48.6 ‫א‬ / ‫א‬ ‫א‬
22.3 22.3 ( ‫א‬ ) ‫א‬ ‫א‬
**
11.25 ***
11.49 ***
11.29 ***
11.33 ***
12.92 ***
12.87 ***
12.84 ‫א‬ ‫א‬ ‫/א‬ ‫א‬ ‫א‬
5.9 5.9 6.2 6.4 6.2 6.6 6.4 ** ‫/א‬ ‫א‬
5.6Chahir Zaki (FEPS, Cairo University) 4.2
5.5 4.2 4.3 4.3 4.4
Money, Banking and Financial Markets ** ‫/א‬ ‫א‬
Second Semester, 2012 24 / 25

25. References
Mishkin, chapter 2.
The lectures of Prof. Heiko Fritz.
Akerlof (1970).
The CBE, Monthly Report, June 2011.
Chahir Zaki (FEPS, Cairo University) Money, Banking and Financial Markets Second Semester, 2012 25 / 25