About the data
Definitions
Data sources
Money and the financial accounts that record the supply of money lie at the heart of a country's financial system. There are several commonly used definitions of the money supply. The narrowest, often called M1, encompasses currency held by the public and demand deposits with banks. M2 includes M1 plus time and savings deposits with banks that require a notice for withdrawal. A broader definition is M3, which includes M2 plus assorted money market instruments, such as certificates of deposit issued by banks, bank deposits denominated in foreign currency, and deposits with financial institutions other than banks. However defined, money is a liability of the banking system, distinguished from other bank liabilities by the special role it plays as a medium of exchange, a unit of account, and a store of value.
A change in money occurs when any other liability or asset in banks' balance sheets changes, because the assets and liabilities must always balance. Net foreign assets comprise the international reserves of the central bank held in short-term foreign assets, such as claims on other central and commercial banks, treasury bills and other short-term bonds of foreign governments or international institutions, holdings of gold, and special drawing rights, adjusted for all short-term foreign exchange liabilities of the banking system. The change in money supply resulting from a change in net foreign assets depends on a country's trade position, capital inflows and outflows, and trade financing and is therefore not entirely within the control of the monetary authorities.
Net domestic credit consists of bank credit to the nonfinancial public sector-investments in short- and long-term government securities and loans to state enterprises-and credit to the private sector, netting out public and private sector deposits with the banking system. Net domestic credit is the main vehicle through which the authorities regulate changes in the money supply, with central bank lending to the government often playing the most important role. The central bank can regulate lending to the private sector in three ways: by adjusting the cost of its refinancing facilities provided to banks, by changing market interest rates through open market operations, or by controlling the availability of credit through changes in the reserve requirements imposed on banks and ceilings on the credit provided by banks to the private sector.
The income velocity of money is defined as the number of times a given quantity of money is used to mediate transactions. At the World Bank it is usually measured by the ratio of nominal GDP, a proxy for transactions, to the quantity of money. The velocity of money tends to decline secularly with the development of the economy, because money, particularly deposit money, tends to increase as monetization accelerates and banking facilities expand. But the velocity of money fluctuates widely in the short term, depending on the macroeconomic situation. In an inflationary environment there is often a flight from money into goods, which increases the velocity of money.
Monetary accounts are derived from the balance sheets of financial institutions-the central bank, commercial banks, and nonbank financial intermediaries. Although these balance sheets are usually reliable, they are subject to errors of classification and valuation and differences in accounting practices. For example, whether interest income is recorded on an accrual or a cash basis can make a substantial difference, as can the treatment of nonperforming assets. Errors of valuation typically arise with respect to foreign exchange transactions, particularly in countries with flexible exchange rates or in those that have undergone a currency devaluation during the reporting period. Banks may use different exchange rates to convert accounts denominated in foreign currency into local currency values. They are also likely to use the prevailing exchange rate on the day of the transaction in converting foreign exchange into local currency or vice versa. Such practices may result in differences between the value in foreign currency converted at an average exchange rate for the year or for each quarter and that based on reporting by commercial banks in local currency. Similar problems may arise in valuing gold or in renegotiating foreign exchange liabilities (as in a debt rescheduling agreement).
The quality of commercial bank reporting also may be adversely affected by delays in reports from bank branches, especially in countries where branch accounts have not been computerized. Thus the data in the balance sheets of commercial banks may be based on preliminary estimates subject to constant revision. This problem is likely to be even more acute for nonbank financial intermediaries.
• Money and quasi money comprise the sum of currency outside banks, demand deposits other than those of the central government, and the time, savings, and foreign currency deposits of resident sectors other than the central government. This definition of the money supply is frequently called M2 (IFS line 34 and 35). The change in money supply is measured as the difference in end-of-year totals relative to the level of M2 in the preceding year.
• Net foreign assets (IFS line 31n) are the sum of foreign assets held by monetary authorities and deposit money banks, less their foreign liabilities.
• Domestic credit (IFS line 32) is the sum of net credit to the nonfinancial public sector, credit to the private sector, and other accounts.
• Claims on the private sector (IFS line 32d) include gross credit from the financial system to individuals, enterprises, nonfinancial public entities not included under net domestic credit, and financial institutions not included elsewhere.
• Claims on governments and other public entities (IFS line 32an + 32b + 32bx + 32c) usually comprise direct credit for specific purposes such as financing of the government budget deficit or loans to state enterprises, advances against future credit authorizations, and purchases of treasury bills and bonds. Public sector deposits with the banking system also include sinking funds for the service of debt and temporary deposits of government revenues.
• Income velocity of money and quasi money is the ratio of GDP at purchasers' prices to the money supply measured as M2.
The International Monetary Fund (IMF) collects data on the financial systems of its member countries. The data in the table are published in the monthly International Financial Statistics and the annual International Financial Statistics Yearbook. The World Bank receives data from the IMF in electronic files that may contain more recent revisions than the published sources. GDP is from the World Bank's national accounts files. The discussion of monetary indicators draws heavily from the IMF publication by Marcello Caiola, A Manual for Country Economists (1995).