Currency System and Money Supply

Abstract

In recent years there has been a growing interest in money supply both as an analytical concept and a policy variable. It is well known that in comparative static analysis, changes in money stock generate multiplier effects on nominal income, though the size of this may vary considerably according to the behavioural assumptions of the underlying model.1 In the long run money, whether treated as a factor input or consumer good, may produce non-neutral effects on the equilibrium growth path of the economy.2 Quite apart from the contemporary revival of the Quantity Theory, therefore, money supply is of great importance whether viewed from cyclical stabilisation or from secular growth. While the purely theoretical aspects of money supply cannot be treated here, it will evidently be of interest to analyse the determination of money supply in Hong Kong, its special characteristics and the role of the banking system in this process of determination. The present chapter is concerned with these problems.