This article has been prepared mainly by C. M. Miles and P. A. Bull of the Bank's Economic Intelligence Department.
The definition of the money supply most widely used in the United Kingdom is sterling M3. Broadly speaking this consists of notes and coin plus the sterling bank deposits of the private sector. External transactions which affect sterling M3 are therefore only those which increase or diminish the sterling deposits of the private sector. By no means all balance of payments transactions do this, so that the relationship between external influences on sterling M3 and the balance of payments is somewhat complex. Moreover, a regime of floating rates, where foreign currency transactions must balance out, does not necessarily guarantee that there will be no external effects on the money supply.
This complexity can give rise to problems of identification and analysis. Some of these were described in an article in the March 1975 Bulletin, page 41, but for a number of reasons this is now out of date.
The present article is intended to provide an up-to-date guide. It is, however, a description of the statistical framework only. The article makes no attempt to identify causal relationships.
External and foreign currency flows and the money supply