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THE STATE OF THE EUROPEAN UNION
48
by the banking system and by others to be an
“increase in the speed of circulation of money”.
In any case, bank lending is the basic instrument
for transforming the monetary base into money
supply in the economy as a whole.
We can illustrate this monetary policy trans-
mission mechanism in
Chart 2
.
So it seems clear that the policy of “price
stability” implemented by the central banks ba-
sically operates through bank lending and,
therefore, it is also clear that bank lending is not
only not unconnected to monetary policy, it is
intrinsic in it.
Monetary base, credit and money supply
Economic reality demonstrates the direct rela-
tionship between bank credit and money supply,
the latter being, as we know, the basic objective
of the action of central banks in general and the
European Central Bank in particular, since, logi-
cally, price stability is directly linked to the bal-
ance between supply and demand for money.
As we can see from past data (
Chart 3
),
money supply in the Eurozone (M3) and bank
credit follow a clearly parallel development.
This parallel development of credit and mon-
ey supply is not connected to any specific char-
acteristic of monetary policy in the Eurozone.
We can see that equivalent effects also take
place in other types of economy as disparate as
those of the United States and China (
Chart 4
).
On the other hand, for the reasons that we
set out earlier, the relationship between the
monetary base (M0) and money supply (M3) is
only indirect (
Chart 5
).
And, for the same reasons, we can see how
the relationship between the monetary base and
private credit is also clearly indirect (
Chart 6
).
Indeed, what happened during this econom-
ic crisis clearly reveals that increasing the mon-
etary base is absolutely no guarantee of increas-
ing either credit or the money supply.
Eurosystem
↑
/
↓
monetary base
(M0)
↑
/
↓
base interest
rates
Banking sector
Price stability
↑
/
↓
money suppy
(M3)
Expansive/
contractive
policy
↑
/
↓
credit
Chart 2.
From Eurosystem to price stability
Source:
EKAI Center.