Banco de México

Money supply

December 2019 Banco de México

Money supply

One of the aims of Banco de México is to supply domestic to the economy. To fulfill such mandate, in addition to printing and ordering the minting of by Casa de Moneda de México (Mexican Mint), an entity that is subordinate to the Ministry of and Public (SHCP, for its acronym in Spanish), a money supply system must be in place to guarantee the availability of (money) wherever and whenever, in the denominations and with the quality required by the general public.

Banco de México, jointly with commercial and cash carrier companies, is responsible for the proper functioning of this distribution system. Which variables affect the demand for money?

The demand for banknotes and coins depends on factors that are part of daily life, such as the days of the week, vacations, holidays, and consumption patterns, among others, while the variables that affect the demand for banknotes and coins depend on economic and seasonal factors.

Economic factors

• Economic activity: as economic activity increases, both money transactions and their amounts also do so. Since most commercial transactions in Mexico are done in cash, the use of banknotes and coins also increases.

• Prices: there is an increasing use of banknotes and coins when the prices of goods and services increase.

• of keeping cash: keeping cash means giving up the interest that this money could earn if it were invested in a or other business. For example, in the case of people using the banking system, the cost would be represented by the unearned interest that a bank would pay for a cash investment. On the contrary, for the public not using banking services, becomes a cost, since the same cash amount will be insufficient overtime to pay for the mounting price of goods. When the cost of keeping cash is high, the demand for banknotes and coins decreases and vice versa.

Seasonal factors

Seasonal factors are those that depend on the time of the year. For example, the amount of circulating banknotes and coins is lower at the beginning of the week and increases towards the weekend.

Another example is the Christmas season. The use of banknotes and coins increases significantly during this season. A greater use of cash starts by mid-November and often reaches its peak a few days before Christmas Eve. At the beginning of January, most of the cash handled during the

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Christmas season is finally deposited in banks which, in turn, deposit the money to Banco de México.

The use of forecasts to anticipate the need for banknotes

Forecasts are obtained by statistical analysis. Several aspects are considered to determine the requirement for banknotes. These aspects include: the increase of circulating banknotes and coins due to economic and/or seasonal factors; the replacement of unfit banknotes, which accounts for approximately 70% of the total new requirements; and, the policy, based on which the of new and used fit banknotes is adjusted to attain a pre-established target that will allow to face contingencies, such as natural disasters. The inventory policy also helps to mitigate the impact of forecast errors.

To forecast the amount of unfit banknotes, models that estimate how banknotes remain in circulation are used. These models consider the number of banknotes preserved after entering circulation repeated times, speed of circulation, and effective time in circulation (the time that banknotes remained in Banco de México vaults is subtracted from the total).

The use of forecasts to anticipate the need for coins

The Mexican Mint is in charge of coinage, while Banco de México determines the need and is responsible for issuing and distributing coins. Coinage requirements take into consideration the increase of circulating coins, which is estimated by statistical models, and inventory policy, based on which the stock of new and used fit coins is adjusted to achieve a pre-established target that will allow to face any contingency. In contrast with banknotes, coins suffer a minor deterioration overtime and can remain in circulation for life. Distribution

Banknotes

The banknotes printed at Banco de México’s Banknote Factories (located in Mexico City and Guadalajara) are delivered to Banco de México’s Regional Cashiers or offices in Guadalajara, Hermosillo, Mérida, Monterrey, Veracruz, and Mexico City. The Central Cashiers distribute the notes among the Regional Cashiers, which, in turn, send them to the bank correspondents, which are banking facilities located at towns where there are no Regional Cashiers. Bank correspondents are empowered, on behalf of Banco de México, to meet the requests of banknote deposit and replacement from other banks in their towns. There are bank correspondents in 44 cities.

Both the Regional Cashiers and certain bank correspondents, receive banknotes by air carrier services. Banknotes are delivered by land from the Banknote Factory to Mexico City’s airport in armored vehicles property of Banco de México. Banco de México’s airplanes then transport the banknotes to the airport at the end destination. Finally, banknotes are transported by land to their safeguard. If the destination airport is located in a town that does not have a Regional Cashier, banknotes are transported in Banco de México’s armored vehicles. In the case of banknotes transported to bank correspondents, cash carrier companies are used. To carry out banknote transportation, Banco de México has two Dash8-202 airplanes, bought in

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1999 and used solely to distribute banknotes, and 19 armored vehicles. As of August 2018, Banco de México only uses a CRJ 700 airplane, received in May, in substitution of one of the two Dash8-202 airplanes, which will be dispose of in the next months. The new airplane has a larger range and load capacity than the Dash8-202 planes.

The banknotes are delivered to the requesting banks through the Regional Cashiers or bank correspondents.

Metallic coins

Coinage distribution begins at the Mexican Mint of San Luis Potosí. From this location, coins are delivered to the Regional Cashiers. Cash carrier companies then transport by land the coins to their destination. It is the lawful duty of Banco de México to order coinage to the Mexican Mint and pay for this service.

Since bank correspondents are not involved in the distribution of coins, requirements at the sites that do not have Regional Cashiers are met directly by Banco de Mexico’s head offices through cash carrier companies that transport the coins to the requesting local banks. Bank requests are also handled directly by the Regional Cashiers.

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Fecha

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