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Money in the Modern World

Josef Jílek and Roman Matousek

The book explains the framework of the money, liquidity and monetary policy in the USA, the Eurozone, Japan, and the United Kingdom. Even if the book is based on contemporary banking practice, it arises from careful examination of the historical development of opinions on money, liquidity and monetary policy. The authors claim that money and liquidity (and the financial system as a whole) are demonstrated best through financial statements (balance sheet and income statement) which are based on accounting. Thus any operation is clarified through double-entry record. Furthermore, the fundamentals of the payment systems are outlined.

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Part I: Money 13

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13 Part I: Money 1 Money as monetary aggregates 1.1 Definition of Money What is money? What can be designated as “money”? Such questions are asked by many people including central bankers. The reason is that people are eager to know it and that the main objective of almost every central bank is to maintain the price stability. In order to achieve this target, people and central banks need to know the quantity of money in the economy. For general public money gen- erally indicates anything acceptable as a legal tender in repaying debts and a store of value. Any money represents for one entity claim (financial asset) and for the other en- tity payable (financial liability) at the same time. There are a lot of relationships between creditors and debtors in the economy but only some relationships are considered as money. Money mostly refers to some relationships where the debtors are banks and the creditors are non-bank entities. Relationships where both the debtors and the creditors are banks are not called “money” but “liquid- ity”. However not all claims of non-bank entities, which are at the same time bank liabilities, are covered by the definition of money. Therefore, money (monetary aggregates) is a subset of all relationships between creditors and debtors in the whole economy and more specifically a subset of all relation- ships between non-bank creditors and bank debtors. Money as debt instru- ments represents a subset of financial instruments.1 Banks as debtors ensure high credibility of debtor-creditor...

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