Near money, also known as quasi-money or near-cash, refers to highly liquid assets that can be quickly converted into cash but are not considered actual currency. These assets are not as liquid as cash but are close or near substitutes and can be easily converted to cash or used for making payments. Near money plays a role in the broader concept of money supply in an economy.
Common examples of near money include:
- Certificates of Deposit (CDs): time deposits with fixed maturities and interest rates issued by banks. While they are not as liquid as cash, CDs can be converted to cash relatively easily by selling them in the secondary market or by redeeming them before maturity.
- Money Market Instruments: Short-term, highly liquid financial instruments, such as Treasury bills, commercial paper, and repurchase agreements (repos), that provide a return similar to that of cash. These instruments are often used by investors looking for low-risk, short-term investments.
- Savings Accounts: bank savings accounts are considered near money because the funds deposited can be easily withdrawn. However, compared to checking accounts, there may be limitations on the number of withdrawals or transfers allowed.
- Short-Term Government Securities: securities issued by governments with short) maturities, such as Treasury bills. These securities are highly liquid and can be sold in the secondary market before maturity.
- Money Market Funds: mutual funds that invest in short-term, highly liquid instruments such as Treasury bills and commercial paper. While not as liquid as cash, money market funds are considered near money because they offer a high degree of liquidity.
Near money is an important concept in measuring the money supply in an economy. Economists often classify assets into different categories based on their liquidity and degree of being near substitutes for cash. The money supply is typically categorized into different levels, with near money falling into broader measures of money that include assets that are readily convertible to cash.
Understanding the distinction between near money and other forms of assets is crucial for assessing the overall liquidity and stability of financial markets and the economy. central banks and policymakers closely monitor the money supply and its components to make informed decisions about monetary policy.
Central Banks
Near money, as part of the broader concept of money supply, can influence central bank policy and its decisions in several ways. The money supply is a key economic indicator that central banks monitor closely, and it plays a significant role in the formulation of monetary policy. Here are some ways in which near money affects central bank policy:
- Liquidity Management:
- Central banks aim to maintain overall economic stability, and part of that involves managing liquidity in the financial system. Near money, being assets that can be easily converted to cash, affects the overall liquidity conditions in the economy.
- If there is an excess of near money in the financial system, it may contribute to lower short-term interest rates, as investors may seek to invest in these liquid assets rather than riskier, less liquid options.
- Interest Rate Policy:
- The level of near money in the economy can influence short-term interest rates. Central banks often use interest rate tools, such as the policy interest rate, to achieve monetary policy objectives. An abundance of near money may contribute to lower interest rates, while a shortage may push rates higher.
- By adjusting interest rates, central banks can influence borrowing and spending behavior, affecting overall economic activity.
- Open Market Operations:
- Central banks conduct open market operations to manage the money supply. Near money, being part of the broader money supply, is affected by these operations. For example, the central bank may buy or sell government securities in the open market to influence the level of reserves in the banking system.
- Adjusting the money supply through open market operations can impact the availability of near money and influence short-term interest rates.
- Inflation Targeting:
- Central banks often have inflation targets, and they use monetary policy tools to achieve and maintain price stability. The level of near money can influence inflationary pressures in the economy.
- If the supply of near money is abundant, it may contribute to increased spending, potentially leading to inflationary pressures. Conversely, a scarcity of near money may result in reduced spending and lower inflation.
- Financial Stability:
- The composition of the money supply, including near money, can affect financial stability. Central banks are concerned with the stability of the financial system, and they may adjust policy to address issues related to liquidity, market functioning, and the overall health of financial institutions.
Understanding the role of near money allows central banks to assess the overall financial landscape, make informed decisions about monetary policy, and address economic challenges. Central banks use a combination of tools, including interest rate adjustments, open market operations, and macroprudential policies, to achieve their policy objectives while considering the dynamics of near money in the broader economy.