[PDF Notes] Following are the main points of significance of near-money

Following are the main points of significance of near-money:

1. Broader Definition of Money:

The existence of near-money has broadened the definition of money. The modern concept of money is based on the liquidity approach, as compared to the traditional definition depending upon the transactions approach.

In the transactions approach, money is defined as to include only legal tender money and bank money.

On the other hand, in the liquidity approach, the definition of money includes (a) legal tender money (b) bank money and (c) near-money, i.e., all those financial assets which can be easily and inexpensively converted into money proper within a short period of time.

2. Increase in Velocity of Money:

Near-money influences the velocity of money. A person’s ability to spend depends not only on the amount of money he has with him and he holds in the bank (i.e., legal money and bank money), but also on his ability to raise additional funds by selling his near-money assets.

In the words of Radcliffe Committee Report, “spending is not limited by the amount of money in existence, but it is related to the amount of money people think they can get hold of whether by receipt of income (for instance from sales), by disposal of capital assets or by borrowing”.

Thus, the existence of near-money increases the velocity of money (V) and hence aggregate demand (MV) in the economy by activating idle demand deposits and currency.

3. Policy Implications:

Near-money has important policy implications for the monetary authorities. The prevalence of near-money assets significantly increases the overall level of liquidity and hence the level of aggregate expenditure.

The monetary authority which aims at influencing the level of aggregate expenditure by controlling the money supply alone will fail to achieve its objective.

For the monetary policy to be effective, it must influence not only the total stock of money in the economy, but also the total stock of near-money assets.

In other words, it must influence not the money supply alone, but the overall level of liquidity.

Since the central bank does not have much control over the lending activities of nonbank financial institutions, the growth of near-money assets may create problems in the effective implementation of the monetary policy.

Leave a Reply

Your email address will not be published. Required fields are marked *