The component of the money supply in an economy which is directly created by the government or central bank, such as notes and coins. The central bank or monetary authorities can only control this component of money supply. A central bank can change the quantity of fiat money by increasing or decreasing the amount of cash injected into the veins of the economy. However, the bulk of the money supply is made up of deposits (i.e., the inside money component). And there is no direct way to control this component.
Fiat money is not the only method of payment. Economic agents can resort to other methods such as interest-bearing credit and instruments (e.g. government bonds).
Fiat money is sometimes referred to as outside money.
