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What are Monetary Aggregates? Research Team | Posted On Wednesday, April 29,2009, 02:17 PM

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What are Monetary Aggregates?



What are Monetary Aggregates?

In economics money supply or money stock is the total quantity of money obtainable in a financial system at a particular point in time. There are some ways to define money, but standard actions usually include currency in circulation and demand deposits. Money supply information is record and published usually by the government or the central bank of the country. Public and private-sector analysts have long monitored changes in money supply because of its possible effects on the price level inflation and the business cycle. That relation between money and prices is historically connected with the quantity theory of money. There is strong empirical confirmation of a direct experimental relation between long-term price inflation and money-supply growth. These motivate the current dependence on monetary policy as a means of controlling inflation.

Money is used in last settlement of a debt and as a ready store of value. Its different functions are connected with different experiential events of the money supply. Since most modern financial systems are regulated by governments through monetary policy, the supply of money is broken down into types of money based on how much of an effect financial policy can have on each. Narrow actions include those more directly affected by monetary policy, whereas broader actions are less closely connected to monetary-policy actions. Each measure can be classified by placing it along a range between narrow and broad monetary aggregates. The different types of money are typically classified as M’s. The number of M’s usually range from M0 (narrowest) to M3 (broadest) but which M’s are really used depends on the system. The usual explain for each of the M’s is as follows:

  •  M0: Currency in circulation + Bankers deposits with the RBI + Other deposits with the RBI = Net RBI credit to the Government + RBI credit to the commercial sector + RBI’s claims on banks + RBI’s net foreign assets + Government’s currency liabilities to the public – RBI’s net non-monetary liabilities.
  • M1: Currency with the public + Deposit money of the public (Demand deposits with the banking system + other deposits with the RBI).
  • M2: Currency with the public + Deposit money of the public (Demand deposits with the banking system + other deposits with the RBI) + Savings deposits with Post office savings banks.
  • M3: M2+ Time deposits with the banking system = Net bank credit to the Government + Bank credit to the commercial sector + Net foreign exchange assets of the banking sector + Government’s currency liabilities to the public – Net non-monetary liabilities of the banking sector (Other than Time Deposits).
  • M4: M3 + All deposits with post office savings banks (excluding National Savings Certificates).

In short, there are two types of money in a fractional-reserve banking system:

  • Central bank money (physical currency, government money)
  • Commercial bank money (money created through loans) - sometimes referred to as private money, or checkbook money

In the money supply statistics, central bank money is M0 although the commercial bank money is divided up into the M1-M3 components.  Normally the types of commercial bank money that tend to be valued at lower amounts are classified in the narrow category of M1 though the types of commercial bank money that tend to exist in larger amounts are categorized in M2, M3 and M4 with M4 having the largest.

Types of money in other Countries

United Kingdom

There are just two official measures of money in UK. M0 is referred to as the wide monetary base or narrow money and M4 is referred to as broad money or simply the money supply.

  • M0: Cash outside Bank of England + Banks operational deposits with Bank of  England.
  • M4: Cash outside banks (in circulation with the public and non-bank firms) + private-sector retail bank and building society deposits + Private-sector wholesale bank and building society deposits and Certificate of Deposit.

There are several different definitions of money supply to reproduce the differing stores of money. Due to the nature of bank deposits especially time-restricted savings account deposits, the M4 represents the most illiquid calculate of money. M0 by contrast is the most liquid measure of the money supply.

European Union

The European Central Bank's definition of euro area monetary aggregates:

  • M1: Currency in circulation + overnight deposits
  •  M2: M1 + Deposits with an agreed maturity up to 2 years + Deposits redeemable at a period of notice up to 3 months
  • M3: M2 + Repurchase agreements + Money market fund (MMF) shares/units + Debt securities up to 2 years


The Reserve Bank of Australia defines the monetary aggregates as:

  • M1: currency bank + current deposits of the private non-bank sector
  • M3: M1 + all other bank deposits of the private non-bank sector
  • Broad Money: M3 + borrowings from the private sector by NBFIs, less the latter's holdings of currency and bank deposits
  • Money Base: holdings of notes and coins by the private sector plus deposits of banks with the Reserve Bank of Australia (RBA) and other RBA liabilities to the private non-bank sector

New Zealand

The Reserve Bank of New Zealand defines the monetary aggregates as:

  • M1: notes and coins held by the public plus chequeable deposits, minus inter-institutional chequeable deposits, and minus central government deposits
  • M2: M1 + all non-M1 call funding (call funding includes overnight money and funding on terms that can of right be broken without break penalties) minus inter-institutional non-M1 call funding
  • M3: the broadest monetary aggregate. It represents all New Zealand dollar funding of M3 institutions and any Reserve Bank repos with non-M3 institutions. M3 consists of notes & coin held by the public plus NZ dollar funding minus inter-M3 institutional claims and minus central government deposits


The Bank of Japan defines the monetary aggregates as;

  • M1: cash currency in circulation + deposit money
  • M2 + CDs: M1 + quasi-money + CDs
  • M3 + CDs: (M2 + CDs) + deposits of post offices + other savings and deposits with financial institutions + money trusts
  • Broadly-defined liquidity: (M3 + CDs) + pecuniary trusts other than money trusts + investment trusts + bank debentures + commercial paper issued by financial institutions + repurchase agreements and securities lending with cash collateral + government bonds + foreign bonds

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