Money in the modern economy

Apuntes

Money in the modern economy 4 Quarterly Bulletin 2014 Q1 Money in the modern economy: an introduction By Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate. (1) • Money is essential to the workings of a modern economy, but its nature has varied substantially over time. This article provides an introduction to what money is today. • Money today is a type of IOU, but one that is special because everyone in the economy trusts that it will be accepted by other people in exchange for goods and services. • There are three main types of money: currency, bank deposits and central bank reserves. Each represents an IOU from one sector of the economy to another. Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves. Money is a special kind of IOU that is universally trusted. It can take the form of currency printed by the central bank, or the deposits people hold in their commercial bank. In addition, for the commercial banks themselves, reserves held with the central bank represent another form of money. Trade If someone happens to want what someone else produces and vice versa then excha...