Introducing M3: The Broadest Measure of Money Supply
M3 is a measure of the money supply that encompasses M2 along with large time deposits, institutional money market funds, short-term repurchase agreements (repo), and larger liquid assets. These elements are collectively referred to as ’near money,’ highlighting their close ties with the finances of major financial institutions and corporations, rather than small businesses or individuals.
Key Takeaways
- M3 Composition: M3 includes M2 money, large time deposits, institutional money market funds, short-term repurchase agreements, and other large liquid assets.
- Institutional Focus: M3 is more relevant to larger financial institutions and corporations than small businesses and individuals.
- Historical Use: Economists used M3 to gauge an entire economy’s money supply and policymakers to manage inflation and guide economic pathways.
- Publication Halt: Since 2006, the Federal Reserve stopped publishing M3 figures, although other entities still provide these statistics.
A Deep Dive into M3
The money supply, often described as the money stock, includes various classifications gauged by liquidity levels. The broadest of these classifications is M3. This measure encompasses assets with significant value a store than as readily cashable resources or a medium of exchange.
As of July 2023, the United States’ M3 value totals $20.9 trillion.
Traditionally, economists have used M3 to estimate an aggregate money supply tailored to policymakers’ strategies to manage inflation and foster economic growth over medium to long timelines. The calculation treats each M3 component equally—large deposits are aggregated with small, without weighting adjustments—though this lack of nuance is viewed as a limitation.
The Disuse of M3: A Changing Perspective
The discontinuation of M3 by the U.S. Federal Reserve in 2006 reflects a broader shift, with policymakers favoring M2 and, eventually, more complex judgment tools to guide economic policy beyond simple money aggregates.
Despite this, the Federal Reserve Bank of St. Louis and other economic research agencies continue to publish M3 statistics.
M3 and Other Monetary Classifications: Understanding their Hierarchy
M0: Currency in actual circulation like cash and coins.
M1: Incorporates M0 plus demand deposits, traveler’s checks, and other quickly accessible monetary instruments.
M2: Encompasses M1 and M0 with the addition of savings deposits and certificates of deposit—classifications indicative of less liquid assets compared to M1.
M3: The summit of money supply classification, encompassing all from M0 through M2 and broadening it with less liquid assets like long-term repurchase agreements.
Exploring Broader Measures - M1, M2, and M4
M1: Encompassing all circulating money and bank deposits.
M2: Incorporates M1 alongside savings and money market deposits.
M4 (UK-specific): Translates the concept to the UK’s economy, integrating public-held money, private sector financial transactions, and banking deposits.
As of July 2023, the present M1 valuation stands at approximately $18.4 trillion USD.
Conclusions
M3 represents the zenith of monetary classifications by including M0, M1, M2, plus additional larger liquid assets. Although the Federal Reserve stopped publishing M3 figures in 2006, it continues to be monitored by other providers for historical comparative analysis.
Related Terms: money supply, M1, M2, inflation, monetary policy.
References
- Federal Reserve Bank of Richmond. “Monetary Aggregates: A User’s Guide”.
- Board of Governors of the Federal Reserve System. “H.6 Release–Discontinuance of M3”.
- Federal Reserve Bank of St. Louis. “Monetary Aggregates and Their Components: Broad Money and Components: M3 for United States”.
- Federal Reserve Bank of San Francisco. “How Did the Fed Change Its Approach to Monetary Policy in the Late 1970s and Early 1980s?”
- Bank of England. “Explanatory Notes - M4”.
- Board of Governors of the Federal Reserve System. “Money Stock Measures”.
