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Financial sector

Money, credit and banking

Money is at the core of modern society, not least due to its role in the many different transactions made by households and firms every day. The transactions range from small everyday purchases to large-scale financial transactions. Against this backdrop, the money stock, i.e. households’ and firms’ holdings of money, attracts interest. This article discusses what money is and what drives the money stock. The development in the money stock is closely linked to lending by banks and mortgage banks, which is also considered. Money is essentially liquid claims that are stable in value and can also serve as a unit of account. Besides cash, i.e. banknotes and coins, the standard definitions of money also include other liquid claims such as bank deposits. This reflects that deposits can be used as a means of payment alongside cash. In practice, there is not one overall monetary aggregate, just as the relevant definition of money has been amended over time. Prior to last century’s increasing use of bank deposits and cheque payments, money was equivalent to cash.