Background
Near money includes financial assets that are not cash but can readily be converted into cash with little or no loss of value. These assets do not serve as a medium of exchange like money but are highly liquid. Also known as quasi-money, these instruments are often crucial in the analysis of money supply and in implementing monetary policy.
Historical Context
The concept of near money has been around for decades, generally arising out of the need to understand and control monetary dynamics beyond physical cash. As the complexity of financial markets increased in the 20th century, the variety of instruments considered near money expanded, including government securities, time deposits, Treasury bills, and money market instruments.
Definitions and Concepts
Near money or quasi-money refers to highly liquid financial instruments that are not actual currency but can quickly be converted into cash. Examples include:
- Treasury bills
- Short-term government bonds
- Certificates of deposit
- Money market funds
They serve the function of reducing the immediate need to hold cash due to their ready convertibility and minimal risk.
Major Analytical Frameworks
Classical Economics
Classical economics primarily focused on the role of actual money (gold, silver, and coins) in the economy but recognized the role of liquid assets in maintaining liquidity in the market.
Neoclassical Economics
Neoclassical Economics extended the framework to include a consideration for different forms and supplies of money, including near money, to understand better asset allocation and demand for money.
Keynesian Economics
Keynesian Economics emphasizes the importance of liquidity preference. Near money plays a critical role in how the public manages its liquidity in Keynes’ framework.
Marxian Economics
Marxian Economics does not explicitly categorize near money but understands the layered nature of different financial instruments contributing to the overall money economy.
Institutional Economics
Institutional Economics places significance on the roles financial institutions play in providing near-money instruments and thus influencing the liquidity of markets.
Behavioral Economics
Behavioral Economics studies how people’s attitudes towards risk and liquidity preference influence the demand for near-money instruments.
Post-Keynesian Economics
Post-Keynesians expand on liquidity preference, seeing near money as critical in monetary policy and financial stability.
Austrian Economics
Austrian economists often criticize the over-reliance on near-money instruments due to potential impacts on economic calculation and stability.
Development Economics
In Development Economics, near money is crucial in economies with less-developed banking systems, providing a reliable store of wealth and means of exchange.
Monetarism
Monetarists focus significantly on controlling the supply of near money as part of broader money supply strategies to control inflation and manage economic stability.
Comparative Analysis
Near money provides a safety net for economic stability by allowing for quick liquidity without losing value. Its analysis varies among economic schools based on its role in money supply, liquidity management, and economic policy.
Case Studies
Case studies might include the role of near money in the 2008 financial crisis, illustrating how liquid assets were utilized to stabilize financial institutions or how central banks manage near money during monetary policy implementations.
Suggested Books for Further Studies
- Monetary Theory and Policy by Carl E. Walsh
- Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems by L. Randall Wray
- The Economics of Money, Banking, and Financial Markets by Frederic S. Mishkin
Related Terms with Definitions
- Liquidity: The ease with which an asset can be converted into cash without significant loss of value.
- Treasury Bills: Short-term government debt instruments issued to finance national budgetary needs with maturity up to one year.
- Money Market Funds: Investment funds that invest in short-term, high-quality liquid instruments, often acting as almost-cash due to their stability and liquidity.
- Certificates of Deposit (CDs): Time deposits offered by banks with a fixed interest rate and maturity date, which are less liquid than cash but often offer higher returns.