Monetary Base

The monetary base, also called M0 or high powered money, is the total amount of money created directly by a central bank, made up of currency in circulation among the public, cash held in commercial bank vaults and the reserves commercial banks hold at the central bank. It is distinct from the broader money supply, which includes additional forms of bank deposits beyond base money. Central banks adjust the monetary base through open market operations, buying and selling government securities, because increases in this base money tend to produce a larger expansion in the overall money supply through bank lending, an effect known as the money multiplier, making the monetary base a fundamental tool of monetary policy.