Understanding the Broad Scope of Currency
Currency is commonly associated with physical money, such as banknotes and coins, but its scope can be broadened to include other forms. For instance, deposits in banks and the use of debit cards can facilitate seamless transactions, expanding the concept of currency. As financial systems advance, various financial products have been developed for easy conversion, leading to differing interpretations of the concept and volume of currency.
The Measurements of Currency
Currency volume is measured using currency indicators, which can vary due to the diverse concepts of currency. Central banks of different countries establish specific criteria to define currency indicators and compile statistics for publication. The Bank of Korea, for instance, releases several currency indicators to monitor the movement of funds in the market and to inform monetary policy implementation.
Types of Currency Indicators
The primary currency indicator, base money, refers to the banknotes and coins issued by the Bank of Korea. It can be calculated as the sum of private currency holdings and the reserve requirements of deposit banks. Broad money (M1) encompasses private holdings of banknotes and coins, demand deposits at banks, and other deposits that can be readily converted into cash. Broad money supply (M2) includes M1 and slightly less liquid financial products like time deposits of less than two years and regular savings that can be converted into cash with minimal loss of interest. There are also liquidity measures that expand the concept of currency, such as financial institution liquidity (Lf) and broad liquidity (L). Lf adds financial institution deposits not included in M2, while L includes items like government bonds, corporate bonds, and commercial paper on top of Lf.
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