The monetary base, also called base money, is the most liquid portion of a nation's money supply. It equals currency in circulation outside the central bank plus reserves held by commercial banks at the central bank. In the United States, the base is influenced directly by actions of the Federal Reserve (the Fed).
Central banks influence the base through tools such as open market operations (OMO) and the discount window. Open market operations are transactions in government securities that change reserve balances; they can increase the base by acquiring securities or reduce it by allowing reserve balances to drain. The Fed may also adjust the monetary base through longer-term policy actions, including quantitative easing (QE), a program of asset acquisitions intended to raise liquidity and stimulate lending. The size of the monetary base provides a starting point for the potential growth of broad money via the banking system, but actual credit creation depends on banks' willingness to lend and the demand for loans.
The monetary base is distinct from broader measures of money and represents the directly controllable funding base for the banking system. Changes in the base can influence interest rates and liquidity conditions, but the relationship to overall money supply is influenced by financial conditions and bank behavior.
During the 2008-09 period, the Federal Reserve expanded the monetary base through asset acquisitions, increasing bank reserves and expanding the balance sheet.
Central Bank · Open Market Operations · Reserve Requirements · Currency in Circulation · Bank Reserves · Money Supply · Quantitative Easing