The aspects of money supply policies

A message delivered on the 27th of October that the firepower of the Europe’s rescue fund will be increased to 1 trillion euros, the bondholders will accept a 50 percent loss on their holdings of Greek government debt, the European banks will be recapitalized to meet the target of the core Tier 1 capital equal to 9 percentage of assets, the bond purchase of distressed European countries will be maintained by the ECB and the EFSF as well as expectations that the IMF and countries those possess excessive foreign exchange reserves will support the European leaders plan revitalized financial markets. It also revealed how political decisions are flexible according to the external threats and prevailing demand to keep stability. As long as the intermediation role of the financial institutions in macroeconomic development is incontrovertible, different aspects of money supply policies should be considered.


A pool of traditional deposit funding might be increased by the securitization of various types of debt including the banks’ debts those are sold to the investors. However, increased money supply through market based funding can limit investors’ ability to estimate risks. Off-balance sheet treatment for securitization as well as guarantees those are provided from the issuer may hide the leverage of the securitizing firm, accordingly encourage risky capital structures. Moreover, debt securities depend on the market valuations, thus investors, including financial institutions, may experience significant losses those could have contagious effect.

In general, the money supply depends on the requirement to keep percentage of deposits that banks required to hold as reserves. The higher the reserve requirements, the tighter the money supply which may result to the decrease in lending and restrictions for business development if banks are not able to raise required capital in the markets. Moreover, considering the context of international businesses, the multipliers’ principle in one region may not have impact on its domestic economy growth; consequently increased capital requirements could mainly be associated with the strengthening banks' solvency.

The steering short-term money market interest rates and responding to the demand for the money is the other mode of money supply. Central banks buying government securities or other financial instruments through open market operations increase liquidity in the markets. However, such measures may create conditions for passive governance when central banks respond to the demand of money supply instead of being proactive and generating monetary policies those could relieve current economic circumstances and shift trends to the desirable outcomes.