Money is a measurable concept and the empirical definition of money deals with quantitative aspects of money.
The main problems of empirical definition of money are: (a) to identify the things that serve as money in an economy: and (b) to measure the total stock of money of various kinds at a particular time.
Repeated measurements of total stock of money at different points of time provide time series of money supply which indicate the temporal behaviour of money supply.
This period behaviour of money supply, along with other data and theoretical knowledge can tell us (a) effect of changes in money supply on certain important variables, such as, prices, income, wages, employment, rate of interest, etc.; and (b) how money supply can be changed to achieve certain policy objectives.
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Thus, the study of empirical definition of money is essential for obtaining knowledge about the working of the economy and formulating proper money policy.
Monetary policy requires a meaningful and practical definition of money. Since changes in the supply of money affect important economic variables, they can also influence the attainment of ultimate national economic goals.
The goals of internal price stability, international balance of payments equilibrium, economic growth, high employment are all directly or indirectly affected by the changes in money supply.
Monetary policy which aims at changing the money supply in order to achieve the national economic goals requires the following conditions to be satisfied:
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(i) A close correspondence must exist between the theoretical defintion of money and the empirical (measurable) definition of money.
(ii) The monetary authority must be able to control the empirically defined money supply and to meet the intermediate monetary targets (such as monetary growth rate, interest rates, etc.) with the help of the instruments such as, bank rate, open market operations, etc.
(iii) The empirical definition of money must be closely and predictably related to ultimate national goals. Achievement of monetary growth rate or interest rate targets is not enough. Such achievement must also change economic variables in the desired manner.