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In
macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics Economics () is a social science Social science is the Branches of science, branch of science devoted to the study of socie ...
, the money supply (or money stock) refers to the total volume of
money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corner">174x174px Money is any item or verifiable record that is generally a ...

money
held by the public at a particular point in time in an economy. There are several ways to define "money", but standard measures usually include
currency in circulation In monetary economics, the currency in circulation in a country is the value of currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money Image:Nation ...
and demand deposits (depositors' easily accessed
asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
s on the books of
financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entit ...
s). The
central bank A central bank, reserve bank, or monetary authority is an institution that manages the and of a or formal monetary union, and oversees their . In contrast to a , a central bank possesses a on increasing the . Most central banks also have ...

central bank
of each country may use a definition of what constitutes money for its purposes. Money supply data is recorded and published, usually by the government or the central bank of the country.
Public In public relations Public relations (PR) is the practice of managing and disseminating information from an individual or an organization An organization, or organisation (English in the Commonwealth of Nations, Commonwealth Engli ...
and
private sector The private sector is the part of the economy An economy (; ) is an area of the production Production may be: Economics and business * Production (economics) * Production, the act of manufacturing goods * Production, in the outline of indust ...
analysts monitor changes in the money supply because of the belief that such changes affect the
price level The general price level is a hypothetical measure of overall prices for some set of Good (economics), goods and Service (economics), services (the consumer basket), in an economy or monetary union during a given interval (generally one day), num ...
s of
securities A security is a tradable financial asset A financial asset is a non-physical asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication o ...
,
inflation In economics, inflation refers to a general progressive increase in prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a r ...

inflation
, the
exchange rate In finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, ...
s, and the
business cycle The business cycle, also known as the economic cycle or trade cycle, are the fluctuations of gross domestic product Gross domestic product (GDP) is a monetary Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the pl ...

business cycle
. The relationship between money and prices has historically been associated with the
quantity theory of money#REDIRECT Quantity theory of money In monetary economics, the quantity theory of money (QTM) states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply In macroeco ...
. There is strong
empirical Empirical evidence for a proposition In logic and linguistics, a proposition is the meaning of a declarative sentence (linguistics), sentence. In philosophy, "Meaning (philosophy), meaning" is understood to be a non-linguistic entity which is s ...
evidence of a direct relationship between the growth of the money supply and long-term price inflation, at least for rapid increases in the amount of money in the economy. For example, a country such as
Zimbabwe Zimbabwe (), officially the Republic of Zimbabwe, is a landlocked country A landlocked country is a country A country is a distinct territory, territorial body or political entity. It is often referred to as the land of an individ ...

Zimbabwe
which saw extremely rapid increases in its money supply also saw extremely rapid increases in prices (
hyperinflation In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of pl ...

hyperinflation
). This is one reason for the reliance on
monetary policy Monetary policy is the policy adopted by the monetary authority In finance and economics, a monetary authority is the entity that manages a country’s currency and money supply, often with the objective of controlling inflation targeting, infla ...

monetary policy
as a means of controlling inflation.


Money creation by commercial banks

Commercial banks play a role in the process of money creation, under the
fractional-reserve banking Fractional-reserve banking is the system of banking A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directl ...
system used throughout the world. In this system,
credit px, Domestic credit to private sector in 2005 Credit (from Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, k ...
is created whenever a bank gives out a new loan and destroyed when the borrower pays back the principal on the loan. This new money, in net terms, makes up the non-M0 component in the M1-M3 statistics. In short, there are two types of money in a fractional-reserve banking system: * central bank money — obligations of a central bank, including
currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money Money is any item or verifiable record that is generally accepted as payment for goods and services ...

currency
and central bank depository accounts * commercial bank money — obligations of commercial banks, including checking accounts and savings accounts. In the money supply statistics, central bank money is MB while the commercial bank money is divided up into the M1-M3 components. Generally, the types of commercial bank money that tend to be valued at lower amounts are classified in the narrow category of M1 while the types of commercial bank money that tend to exist in larger amounts are categorized in M2 and M3, with M3 having the largest. In the United States, a bank's reserves consist of U.S. currency held by the bank (also known as "vault cash") plus the bank's balances in Federal Reserve accounts. For this purpose, cash on hand and balances in
Federal Reserve The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series ...

Federal Reserve
("Fed") accounts are interchangeable (both are obligations of the Fed). Reserves may come from any source, including the federal funds market, deposits by the public, and borrowing from the Fed itself.


Open market operations by central banks

Central bank A central bank, reserve bank, or monetary authority is an institution that manages the and of a or formal monetary union, and oversees their . In contrast to a , a central bank possesses a on increasing the . Most central banks also have ...

Central bank
s can influence the money supply by open market operations. They can increase the money supply by purchasing government securities, such as
government bond A government bond or sovereign bond is an debt obligation issued by a national government to support government spending. It generally includes a commitment to pay periodic interest, called ''coupon payments,'' and to repay the face value on t ...
s or
treasury bill United States Treasury securities are government bond, government debt instruments issued by the United States Department of the Treasury to finance government spending as an alternative to taxation. Treasury Security (finance), securities are o ...
s. This increases the liquidity in the banking system by converting the illiquid securities of commercial banks into liquid deposits at the central bank. This also causes the price of such securities to rise due to the increased demand, and interest rates to fall. These funds become available to commercial banks for lending, and by the
multiplier effect In macroeconomics, a multiplier is a factor of proportionality that measures how much an endogenous variable changes in response to a change in some exogenous variable. For example, suppose variable ''x'' changes by 1 unit, which causes another v ...
from
fractional-reserve banking Fractional-reserve banking is the system of banking A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directl ...
, loans and bank deposits go up by many times the initial injection of funds into the banking system. In contrast, when the central bank "tightens" the money supply, it sells securities on the open market, drawing liquid funds out of the banking system. The prices of such securities fall as supply is increased, and interest rates rise. This also has a multiplier effect. This kind of activity reduces or increases the supply of short term government debt in the hands of banks and the non-bank public, also lowering or raising interest rates. In parallel, it increases or reduces the supply of loanable funds (money) and thereby the ability of private banks to issue new money through issuing debt. The simple connection between monetary policy and monetary aggregates such as M1 and M2 changed in the 1970s as the
reserve requirements Reserve or reserves may refer to: Places * Reserve, Kansas Reserve is a city in Brown County, Kansas, Brown County, Kansas, United States. As of the 2010 United States Census, 2010 census, the city population was 84. It is located approximate ...
on deposits started to fall with the emergence of
money fund A money market fund (also called a money market mutual fund) is an open-ended mutual fund that invests in short-term debt securities such as Treasury bill, US Treasury bills and commercial paper. Money market funds are managed with the goal of main ...
s, which require no reserves. At present, reserve requirements apply only to " transactions deposits" – essentially
checking accounts Check or cheque, may refer to: Places * Check, Virginia Check is an unincorporated community in Floyd County, Virginia, Floyd County, Virginia, United States. Check is located on U.S. Route 221 northeast of Floyd, Virginia, Floyd. Check has a pos ...
. The vast majority of funding sources used by private banks to create loans are not limited by bank reserves. Most commercial and industrial loans are financed by issuing large denomination
CDs The compact disc (CD) is a digital Digital usually refers to something using digits, particularly binary digits. Technology and computing Hardware *Digital electronics Digital electronics is a field of electronics Electronics compri ...

CDs
.
Money market The money market is a component of the economy which provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less. As short-term securities became a commodity In economics Economic ...
deposits are largely used to lend to corporations who issue
commercial paper Commercial paper, in the global financial market, is an Unsecured debt, unsecured promissory note with a fixed Maturity (finance), maturity of rarely more than 270 days. In layperson terms, it is like an "wikt:IOU, IOU" but can be bought and so ...
. Consumer loans are also made using savings deposits, which are not subject to reserve requirements. This means that instead of the value of loans supplied responding passively to monetary policy, we often see it rising and falling with the demand for funds and the willingness of banks to lend. Some economists argue that the money multiplier is a meaningless concept, because its relevance would require that the money supply be
exogenous In a variety of contexts, exogeny or exogeneity () is the fact of an action or object originating externally. It contrasts with endogeneity or endogeny, the fact of being influenced within a system. Economics In an economic An economy (; ) ...
, i.e. determined by the monetary authorities via open market operations. If central banks usually target the shortest-term interest rate (as their policy instrument) then this leads to the money supply being
endogenous Endogenous substances and processes are those that originate from within a system such as an organism, Tissue (biology), tissue, or Cell (biology), cell. Endogenous substances and processes contrast with exogenous ones, such as Drug, drugs, which ...
. Neither commercial nor consumer loans are any longer limited by bank reserves. Nor are they directly linked proportional to reserves. Between 1995 and 2008, the value of consumer loans has steadily increased out of proportion to bank reserves. Then, as part of the financial crisis, bank reserves rose dramatically as new loans shrank. In recent years, some academic economists renowned for their work on the implications of
rational expectations In economics, "rational expectations" are model-consistent expectations, in that agent (economics), agents inside the model (economics), model are assumed to "know the model" and on average take the model's predictions as valid. Rational expectat ...
have argued that open market operations are irrelevant. These include
Robert Lucas Jr. Robert Emerson Lucas Jr. (born September 15, 1937) is an American economist An economist is a practitioner in the social sciences, social science discipline of economics. The individual may also study, develop, and apply theories and concep ...
,
Thomas Sargent Thomas John Sargent (born July 19, 1943) is an American economist An economist is a practitioner in the social sciences, social science discipline of economics. The individual may also study, develop, and apply theories and concepts from eco ...
,
Neil Wallace Neil Wallace (born 1939) is an American economist and professor at Pennsylvania State University The Pennsylvania State University (Penn State or PSU) is a public In public relations and communication science, publics are groups of indi ...
, Finn E. Kydland,
Edward C. Prescott
Edward C. Prescott
and
Scott Freeman Scott John Freeman (June 9, 1954 – July 23, 2004) was an American economist. He received his undergraduate degree from the University of Wisconsin–Madison A university ( la, universitas, 'a whole') is an institution of higher (or t ...
. Keynesian economists point to the ineffectiveness of open market operations in 2008 in the United States, when short-term interest rates went as low as they could go in nominal terms, so that no more monetary stimulus could occur. This zero bound problem has been called the
liquidity trap A liquidity trap is a situation, described in Keynesian economics, in which, "after the rate of interest has fallen to a certain level, liquidity preference may become virtually absolute in the sense that almost everyone prefers holding cash ...
or " pushing on a string" (the pusher being the central bank and the string being the real economy).


Empirical measures in the United States Federal Reserve System

:''See also
European Central Bank The European Central Bank (ECB) is the prime component of the Eurosystem The Eurosystem is the monetary authority In finance Finance is the study of financial institutions, financial markets and how they operate within the financia ...

European Central Bank
for other approaches and a more global perspective.''
Money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The main functions of money are distinguished as: a ...

Money
is used as a
medium of exchange In economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behavio ...
, as a
unit of account In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...
, and as a ready
store of value A store of value is the function of an asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce pos ...
. These different functions are associated with different
empirical Empirical evidence for a proposition In logic and linguistics, a proposition is the meaning of a declarative sentence (linguistics), sentence. In philosophy, "Meaning (philosophy), meaning" is understood to be a non-linguistic entity which is s ...
measures of the money supply. There is no single "correct" measure of the money supply. Instead, there are several measures, classified along a spectrum or continuum between narrow and broad ''monetary aggregates''. Narrow measures include only the most liquid assets: those most easily used to spend (currency, checkable deposits). Broader measures add less liquid types of assets (certificates of deposit, etc.). This continuum corresponds to the way that different types of money are more or less controlled by monetary policy. Narrow measures include those more directly affected and controlled by monetary policy, whereas broader measures are less closely related to monetary-policy actions. It is a matter of perennial debate as to whether narrower or broader versions of the money supply have a more predictable link to
nominal GDP Gross domestic product (GDP) is a monetary In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corner">174x174px Money is ...
. The different types of money are typically classified as "M"s. The "M"s usually range from M0 (narrowest) to M3 (broadest) but which "M"s are actually focused on in policy formulation depends on the country's central bank. The typical layout for each of the "M"s is as follows: * : In some countries, such as the United Kingdom, M0 includes bank reserves, so M0 is referred to as the monetary base, or narrow money. * MB: is referred to as the
monetary base In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
or total currency. This is the base from which other forms of money (like checking deposits, listed below) are created and is traditionally the most liquid measure of the money supply. * M1: Bank reserves are not included in M1. * M2: Represents M1 and "close substitutes" for M1. M2 is a broader classification of money than M1. M2 is a key economic indicator used to forecast inflation. * M3: M2 plus large and long-term deposits. Since 2006, M3 is no longer published by the US central bank.Discontinuance of M3
Federal Reserve, November 10, 2005, revised March 9, 2006.
However, there are still estimates produced by various private institutions. * MZM: Money with zero maturity. It measures the supply of financial assets redeemable at par on demand.
Velocity The velocity of an object is the rate of change of its position with respect to a frame of reference In physics Physics is the that studies , its , its and behavior through , and the related entities of and . "Physical scie ...
of MZM is historically a relatively accurate predictor of
inflation In economics, inflation refers to a general progressive increase in prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a r ...

inflation
. The ratio of a pair of these measures, most often M2 / M0, is called the
money multiplierIn monetary economics, a money multiplier is one of various closely related ratios of commercial bank money to central bank money (also called the monetary base) under a fractional-reserve banking Fractional-reserve banking, the most common for ...
.


Definitions of "money"


East Asia


Hong Kong SAR, China

In 1967, when sterling was devalued, the
Hong Kong dollar The Hong Kong dollar (, sign: HK$; code In communication Communication (from Latin ''communicare'', meaning "to share") is the act of developing Semantics, meaning among Subject (philosophy), entities or Organization, groups through th ...
's peg to the pound was increased from 1 shilling 3 pence (£1 = HK$16) to 1 shilling 4½ pence (£1 = HK$14.5455) although this did not entirely offset the devaluation of sterling relative to the US dollar (it went from US$1 = HK$5.71 to US$1 = HK$6.06). In 1972 the Hong Kong dollar was pegged to the US dollar at a rate of US$1 = HK$5.65. This was reduced to HK$5.085 in 1973. Between 1974 and 1983 the Hong Kong dollar floated. On October 17, 1983, the currency was pegged at a rate of US$1 = HK$7.80 through the currency board system. As of May 18, 2005, in addition to the lower guaranteed limit, a new upper guaranteed limit was set for the ong Kong dollar at 7.75 to the American dollar. The lower limit was lowered from 7.80 to 7.85 (by 100 pips per week from May 23 to June 20, 2005). The Hong Kong Monetary Authority indicated that this move was to narrow the gap between the interest rates in Hong Kong and those of the United States. A further aim of allowing the Hong Kong dollar to trade in a range is to avoid the HK dollar being used as a proxy for speculative bets on a renminbi revaluation. The Hong Kong Basic Law and the Sino-British Joint Declaration provides that Hong Kong retains full autonomy with respect to currency issuance. Currency in Hong Kong is issued by the government and three local banks under the supervision of the territory's ''de facto'' central bank, the Hong Kong Monetary Authority. Bank notes are printed by
Hong Kong Note Printing Hong Kong Note Printing Limited prints the bank notes of all the three note-issuing banks in Hong Kong. The banknote printing plant was founded in 1984 by De La Rue, Thomas De La Rue in Tai Po Industrial Estate. In April 1996, the Hong Kong Govern ...
. A bank can issue a Hong Kong dollar only if it has the equivalent exchange in US dollars on deposit. The currency board system ensures that Hong Kong's entire monetary base is backed with US dollars at the linked exchange rate. The resources for the backing are kept in Hong Kong's exchange fund, which is among the largest official reserves in the world. Hong Kong also has huge deposits of US dollars, with official foreign currency reserves of 331.3 billion USD .


Japan

The
Bank of Japan A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporations that provide services as intermediaries of financial markets. Broadly speaking, there are three major types of financial in ...

Bank of Japan
defines the monetary aggregates as: * M1: cash currency in circulation, plus deposit money * M2 + CDs: M1 plus quasi-money and
CDs The compact disc (CD) is a digital Digital usually refers to something using digits, particularly binary digits. Technology and computing Hardware *Digital electronics Digital electronics is a field of electronics Electronics compri ...

CDs
* M3 + CDs: M2 + CDs plus deposits of post offices; other savings and deposits with financial institutions; and money trusts * Broadly defined liquidity: M3 and CDs, plus money market, pecuniary trusts other than money trusts, investment trusts, bank debentures, commercial paper issued by financial institutions, repurchase agreements and
securities lending In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available ...
with cash collateral, government bonds and foreign bonds


Europe


United Kingdom

There are just two official UK measures. M0 is referred to as the "wide
monetary base In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
" or "narrow money" and M4 is referred to as "
broad money In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods an ...
" or simply "the money supply". * M0: Notes and coin in circulation plus banks' reserve balance with
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker, and still one of the bankers for t ...

Bank of England
. (When the bank introduced Money Market Reform in May 2006, the bank ceased publication of M0 and instead began publishing series for reserve balances at the Bank of England to accompany notes and coin in circulation.) * M4: Cash outside banks (i.e. in circulation with the public and non-bank firms) plus private-sector retail bank and building society deposits plus private-sector wholesale bank and building society deposits and certificates of deposit. In 2010 the total money supply (M4) measure in the UK was £2.2 trillion while the actual notes and coins in circulation totalled only £47 billion, 2.1% of the actual money supply. There are several different definitions of money supply to reflect the differing stores of money. Owing to the nature of bank deposits, especially time-restricted savings account deposits, M4 represents the most
illiquid In business Business is the activity of making one's living or making money by producing or buying and selling Product (business), products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit. ...
measure of money. M0, by contrast, is the most liquid measure of the money supply.


Eurozone

The
European Central Bank The European Central Bank (ECB) is the prime component of the Eurosystem The Eurosystem is the monetary authority In finance Finance is the study of financial institutions, financial markets and how they operate within the financia ...

European Central Bank
's definition of euro area monetary aggregates: * M1: Currency in circulation plus overnight deposits * M2: M1 plus deposits with an agreed maturity up to two years plus deposits redeemable at a period of notice up to three months. * M3: M2 plus repurchase agreements plus money market fund (MMF) shares/units, plus debt securities up to two years


North America


United States

. The United States
Federal Reserve The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series ...

Federal Reserve
published data on three monetary aggregates until 2006, when it ceased publication of M3 data and only published data on M1 and M2. M1 consists of money commonly used for payment, basically
currency in circulation In monetary economics, the currency in circulation in a country is the value of currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money Image:Nation ...
and
checking account A transaction account, also called a checking account, chequing account, current account, demand deposit Demand deposits or non-confidential money are funds held in demand account A transaction account, also called a checking account, chequ ...
balances; and M2 includes M1 plus balances that generally are similar to transaction accounts and that, for the most part, can be converted fairly readily to M1 with little or no loss of principal. The M2 measure is thought to be held primarily by households. Prior to its discontinuation, M3 comprised M2 plus certain accounts that are held by entities other than individuals and are issued by banks and thrift institutions to augment M2-type balances in meeting credit demands, as well as balances in money market mutual funds held by institutional investors. The aggregates have had different roles in monetary policy as their reliability as guides has changed. The principal components are: * M0: The total of all physical currency including coinage. M0 =
Federal Reserve Note Federal Reserve Notes, also United States banknotes, are the currently issued banknotes of the United States dollar. The United States Bureau of Engraving and Printing produces the notes under the authority of the Federal Reserve Act of 1913 ...
s + US Notes +
Coins A coin is a small, flat, (usually, depending on the country or value) round piece of metal A metal (from Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hell ...
. It is not relevant whether the currency is held inside or outside of the private banking system as reserves. * MB: The total of all physical currency plus Federal Reserve Deposits (special deposits that only banks can have at the Fed). MB =
Coins A coin is a small, flat, (usually, depending on the country or value) round piece of metal A metal (from Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hell ...
+ US Notes +
Federal Reserve Note Federal Reserve Notes, also United States banknotes, are the currently issued banknotes of the United States dollar. The United States Bureau of Engraving and Printing produces the notes under the authority of the Federal Reserve Act of 1913 ...
s + Federal Reserve Deposits * M1: The total amount of M0 (cash/coin) outside of the private banking system plus the amount of
demand deposit Demand deposits or non-confidential money are funds held in demand account A transaction account, also called a checking account, chequing account, current account, demand deposit account, or share draft account at credit unions, is a deposit ...
s, travelers checks and other checkable deposits + most
savings account A savings account is a bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial transaction A financial transaction is an Contract, agreement, or communication, carried ...
s. * M2: M1 +
money market account A money market account (MMA) or money market deposit account (MMDA) is a deposit account A deposit account is a bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial t ...
s, retail , and small denomination time deposits (
certificates of deposit A certificate of deposit (CD) is a time deposit, a financial product commonly sold by banks, Savings and loan association, thrift institutions, and credit unions. CDs differ from Savings deposit, savings accounts in that the CD has a specific, fix ...

certificates of deposit
of under $100,000). * MZM: 'Money Zero Maturity' is one of the most popular aggregates in use by the Fed because its
velocity The velocity of an object is the rate of change of its position with respect to a frame of reference In physics Physics is the that studies , its , its and behavior through , and the related entities of and . "Physical scie ...
has historically been the most accurate predictor of
inflation In economics, inflation refers to a general progressive increase in prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a r ...

inflation
. It is M2 – time deposits + money market funds * M3: M2 + all other
CDs The compact disc (CD) is a digital Digital usually refers to something using digits, particularly binary digits. Technology and computing Hardware *Digital electronics Digital electronics is a field of electronics Electronics compri ...

CDs
(large time deposits, institutional money market mutual fund balances), deposits of
eurodollar Eurodollars are time deposit A time deposit or term deposit (in the United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contiguous United States, primarily located i ...
s and
repurchase agreement A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of short-term borrowing, mainly in Government debt, government securities. The dealer sells the underlying security to investors and, by agreement bet ...
s. * M4-: M3 +
Commercial Paper Commercial paper, in the global financial market, is an Unsecured debt, unsecured promissory note with a fixed Maturity (finance), maturity of rarely more than 270 days. In layperson terms, it is like an "wikt:IOU, IOU" but can be bought and so ...
* M4: M4- +
T-Bills United States Treasury securities are government debt instruments issued by the United States Department of the Treasury to finance government spending as an alternative to taxation. Treasury securities are often referred to simply as Treasury ...
(or M3 + Commercial Paper +
T-Bills United States Treasury securities are government debt instruments issued by the United States Department of the Treasury to finance government spending as an alternative to taxation. Treasury securities are often referred to simply as Treasury ...
) * L: The broadest measure of liquidity, that the Federal Reserve no longer tracks. L is very close to M4 +
Bankers' Acceptance A banker's acceptance is an instrument representing a promised future payment by a bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. ...
* Money Multiplier: M1 / MB. As of December 3, 2015, it was 0.756. While a multiplier under one is historically an oddity, this is a reflection of the popularity of M2 over M1 and the massive amount of MB the government has created since 2008. Prior to 2020, savings accounts were counted as M2 and not part of M1 as they were not considered "transaction accounts" by the Fed. (There was a limit of six transactions per cycle that could be carried out in a savings account without incurring a penalty.) On March 15, 2020, the Federal Reserve eliminated reserve requirements for all depository institutions and rendered the regulatory distinction between reservable "transaction accounts" and nonreservable "savings deposits" unnecessary. On April 24, 2020, the Board removed this regulatory distinction by deleting the six-per-month transfer limit on savings deposits. From this point on, savings account deposits were included in M1. Although the Treasury can and does hold cash and a special deposit account at the Fed (TGA account), these assets do not count in any of the aggregates. So in essence, money paid in taxes paid to the Federal Government (Treasury) is excluded from the money supply. To counter this, the government created the Treasury Tax and Loan (TT&L) program in which any receipts above a certain threshold are redeposited in private banks. The idea is that tax receipts won't decrease the amount of reserves in the banking system. The TT&L accounts, while demand deposits, do not count toward M1 or any other aggregate either. When the Federal Reserve announced in 2005 that they would cease publishing M3 statistics in March 2006, they explained that M3 did not convey any additional information about economic activity compared to M2, and thus, "has not played a role in the monetary policy process for many years." Therefore, the costs to collect M3 data outweighed the benefits the data provided. Some politicians have spoken out against the decision to cease publishing M3 statistics and have urged the U.S. Congress to take steps requiring the Federal Reserve to do so. Congressman
Ron Paul Ronald Ernest Paul (born August 20, 1935) is an American author, activist, physician, and retired politician who served as the U.S. representative The United States House of Representatives is the lower house A lower house is one o ...

Ron Paul
(R-TX) claimed that "M3 is the best description of how quickly the Fed is creating new money and credit. Common sense tells us that a government central bank creating new money out of thin air depreciates the value of each dollar in circulation."
Modern Monetary Theory Modern Monetary Theory or Modern Money Theory (MMT) is a heterodox macroeconomic theory that describes currency as a public monopoly and unemployment Unemployment, according to the OECD (Organisation for Economic Co-operation and Develo ...
disagrees. It holds that money creation in a free-floating
fiat currency Fiat money (from la, fiat, ) is a type of money that is not backed by any commodity such as gold or silver, and typically declared by a decree A decree is a rule of law usually issued by a head of state A head of state (or chief of sta ...
regime such as the U.S. will not lead to significant inflation unless the economy is approaching full employment and full capacity. Some of the data used to calculate M3 are still collected and published on a regular basis. Current alternate sources of M3 data are available from the private sector. As of April 2013, the
monetary base In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
was $3 trillion and M2, the broadest measure of money supply, was $10.5 trillion.


Oceania


Australia

The
Reserve Bank of Australia The Reserve Bank of Australia (RBA) is Australia's central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a State (polity), state or formal monetary union, and ov ...
defines the monetary aggregates as: * M1:
currency in circulation In monetary economics, the currency in circulation in a country is the value of currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money Image:Nation ...
plus bank current deposits from the private non-bank sector * M3: M1 plus all other bank deposits from the private non-bank sector, plus bank certificate of deposits, less inter-bank deposits * Broad money: M3 plus 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 The Reserve Bank of New Zealand (RBNZ, mi, Te Pūtea Matua) is the central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a State (polity), state or formal monet ...

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


South Asia


India

The
Reserve Bank of India The Reserve Bank of India (RBI) is India's central bank and regulatory body and is responsible for the Money creation, issue and money supply, supply of the Indian rupee and the Bank regulation, regulation of the Banking in India, Indian banki ...

Reserve Bank of India
defines the monetary aggregates as: * Reserve money (M0): Currency in circulation, plus bankers' deposits with the RBI and 'other' deposits with the RBI. Calculated from net RBI credit to the government plus RBI credit to the commercial sector, plus RBI's claims on banks and net foreign assets plus the government's currency liabilities to the public, less the RBI's net non-monetary liabilities. M0 outstanding was 30.297 trillion as on March 31, 2020. * M1: Currency with the public plus deposit money of the public (demand deposits with the banking system and 'other' deposits with the RBI). M1 was 184 per cent of M0 in August 2017. * M2: M1 plus savings deposits with post office savings banks. M2 was 879 per cent of M0 in August 2017. * M3 (the broad concept of money supply): M1 plus time deposits with the banking system, made up of net bank credit to the government plus bank credit to the commercial sector, plus the net foreign exchange assets of the banking sector and the government's currency liabilities to the public, less the net non-monetary liabilities of the banking sector (other than time deposits). M3 was 555 per cent of M0 as on March 31, 2020(i.e. 167.99 trillion.) * M4: M3 plus all deposits with post office savings banks (excluding National Savings Certificates).


Link with inflation


Monetary exchange equation

The money supply is important because it is linked to inflation by the equation of exchange in an equation proposed by
Irving Fisher Irving Fisher (February 27, 1867 – April 29, 1947) was an American economist An economist is a practitioner in the social sciences, social science discipline of economics. The individual may also study, develop, and apply theories and concep ...

Irving Fisher
in 1911: : M\times V = P\times Q where * M is the total dollars in the nation's money supply, * V is the number of times per year each dollar is spent (
velocity of money image:M3 Velocity in the US.png, 300px, Similar chart showing the logged velocity (green) of a broader measure of money M3 that covers M2 plus large institutional deposits. The US no longer publishes official M3 measures, so the chart only runs thr ...
), * P is the average price of all the goods and services sold during the year, * Q is the quantity of assets, goods and services sold during the year. In mathematical terms, this equation is an
identity Identity may refer to: Social sciences * Identity (social science), personhood or group affiliation in psychology and sociology Group expression and affiliation * Cultural identity, a person's self-affiliation (or categorization by others ...
which is true by definition rather than describing economic behavior. That is, velocity is defined by the values of the other three variables. Unlike the other terms, the velocity of money has no independent measure and can only be estimated by dividing by . Some adherents of the quantity theory of money assume that the velocity of money is stable and predictable, being determined mostly by financial institutions. If that assumption is valid then changes in can be used to predict changes in . If not, then a model of is required in order for the equation of exchange to be useful as a macroeconomics model or as a predictor of prices. Most macroeconomists replace the equation of exchange with equations for the
demand for money In monetary economics Monetary economics is the branch of economics that studies the different competing theories of money: it provides a framework for analyzing money and considers its functions (such as medium of exchange, store of value and un ...
which describe more regular and predictable economic behavior. However, predictability (or the lack thereof) of the velocity of money is equivalent to predictability (or the lack thereof) of the demand for money (since in equilibrium real money demand is simply ). Either way, this unpredictability made policy-makers at the
Federal Reserve The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series ...

Federal Reserve
rely less on the money supply in steering the U.S. economy. Instead, the policy focus has shifted to
interest rate An interest rate is the amount of interest In and , interest is payment from a or deposit-taking financial institution to a or depositor of an amount above repayment of the (that is, the amount borrowed), at a particular rate. It is disti ...
s such as the fed funds rate. In practice, macroeconomists almost always use real GDP to define , omitting the role of all transactions except for those involving newly produced goods and services (i.e., consumption goods, investment goods, government-purchased goods, and exports). But the original quantity theory of money did not follow this practice: was the monetary value of all new transactions, whether of real goods and services or of paper assets. The monetary value of assets, goods, and services sold during the year could be grossly estimated using nominal
GDP Gross domestic product (GDP) is a monetary Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the ...
back in the 1960s. This is not the case anymore because of the dramatic rise of the number of financial transactions relative to that of real transactions up until 2008. That is, the total value of transactions (including purchases of paper assets) rose relative to nominal GDP (which excludes those purchases). Ignoring the effects of monetary growth on real purchases and velocity, this suggests that the growth of the money supply may cause different kinds of inflation at different times. For example, rises in the U.S. money supplies between the 1970s and the present encouraged first a rise in the inflation rate for newly-produced goods and services ("inflation" as usually defined) in the 1970s and then asset-price inflation in later decades: it may have encouraged a stock market boom in the 1980s and 1990s and then, after 2001, a rise in home prices, i.e., the famous
housing bubble A housing bubble (or a housing price bubble) is one of several types of asset price bubbles which periodically occur in the market. The basic concept of a housing bubble is the same as for other asset bubbles, consisting of two main phases. First t ...
. This story, of course, assumes that the amounts of money were the causes of these different types of inflation rather than being endogenous results of the economy's dynamics. When home prices went down, the
Federal Reserve The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series ...

Federal Reserve
kept its loose monetary policy and lowered interest rates; the attempt to slow price declines in one asset class, e.g. real estate, may well have caused prices in other asset classes to rise, e.g. commodities.


Rates of growth

In terms of percentage changes (to a close approximation, under low growth rates), the percentage change in a product, say , is equal to the sum of the percentage changes ). So, denoting all percentage changes as per unit of time, : This equation rearranged gives the basic inflation identity: : Inflation (%ΔP) is equal to the rate of money growth (%Δ), plus the change in velocity (%Δ), minus the rate of output growth (%Δ). So if in the long run the growth rate of velocity and the growth rate of real GDP are
exogenous In a variety of contexts, exogeny or exogeneity () is the fact of an action or object originating externally. It contrasts with endogeneity or endogeny, the fact of being influenced within a system. Economics In an economic An economy (; ) ...
constants (the former being dictated by changes in payment institutions and the latter dictated by the growth in the economy’s productive capacity), then the monetary growth rate and the inflation rate differ from each other by a fixed constant. As before, this equation is only useful if %Δ follows regular behavior. It also loses usefulness if the central bank lacks control over %Δ.


Arguments

Historically, in Europe, the main function of the
central bank A central bank, reserve bank, or monetary authority is an institution that manages the and of a or formal monetary union, and oversees their . In contrast to a , a central bank possesses a on increasing the . Most central banks also have ...

central bank
is to maintain low inflation. In the USA the focus is on both inflation and unemployment. These goals are sometimes in conflict (according to the
Phillips curve The Phillips curve is a single-equation economic model, named after William Phillips (economist), William Phillips, hypothesizing an inverse relationship between rates of unemployment and corresponding rates of rises in wages that result within ...

Phillips curve
). A central bank may attempt to do this by artificially influencing the demand for goods by increasing or decreasing the nation's money supply (relative to trend), which lowers or raises interest rates, which stimulates or restrains spending on goods and services. An important debate among economists in the second half of the 20th century concerned the central bank's ability to predict how much money should be in circulation, given current employment rates and inflation rates. Economists such as
Milton Friedman Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist An economist is a professional and practitioner in the social science Social science is the branch The branches and leaves of a tree. A branch ( ...

Milton Friedman
believed that the central bank would always get it wrong, leading to wider swings in the
economy An economy (; ) is an area of the production Production may be: Economics and business * Production (economics) * Production, the act of manufacturing goods * Production, in the outline of industrial organization, the act of making products ...

economy
than if it were just left alone. This is why they advocated a non-interventionist approach: one of targeting a pre-specified path for the money supply independent of current economic conditions, even though in practice this might involve regular intervention with
open market operations In macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest ...
(or other monetary-policy tools) to keep the money supply on target. The former Chairman of the US Federal Reserve,
Ben Bernanke Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist at the Brookings Institution The Brookings Institution, often referred to simply as Brookings, is an American American(s) may refer to: * American, something of, from, ...

Ben Bernanke
, suggested in 2004 that over the preceding 10 to 15 years, many modern central banks became relatively adept at manipulation of the money supply, leading to a smoother business cycle, with recessions tending to be smaller and less frequent than in earlier decades, a phenomenon termed "The
Great Moderation The Great Moderation is a period starting from the mid-1980s until 2007 characterized by the reduction in the volatility of business cycle The business cycle, also known as the economic cycle or trade cycle, are the fluctuations of gross domes ...
"Speech, Bernanke – The Great Moderation
Federal Reserve Bank (February 20, 2004).
This theory encountered criticism during the
global financial crisis of 2008–2009 Global means of or referring to a globe A globe is a spherical physical model, model of Earth, of some other astronomical object, celestial body, or of the celestial sphere. Globes serve purposes similar to some maps, but unlike maps, do not dis ...
. Furthermore, it may be that the functions of the central bank need to encompass more than the shifting up or down of interest rates or bank reserves: these tools, although valuable, may not in fact moderate the volatility of money supply (or its velocity).


Impact of digital currencies and possible transition to a cashless society


See also

* '' A Program for Monetary Reform'' *
American Monetary Institute{{improverefs, date=January 2020 The American Monetary Institute is a non-profit charitable trust established by Stephen Zarlenga in 1996 for the "independent study of monetary history, theory and reform." Aims The institute is dedicated to monetary ...
*
Bank regulation Bank regulation is a form of government A government is the system or group of people governing an organized community, generally a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthl ...
*
Capital requirement A capital requirement (also known as regulatory capital or capital adequacy) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital adequacy ratio o ...
*
Central bank A central bank, reserve bank, or monetary authority is an institution that manages the and of a or formal monetary union, and oversees their . In contrast to a , a central bank possesses a on increasing the . Most central banks also have ...

Central bank
*
Chartalism In macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics Economics () is the social science that studies how people interact with value; in particular, the Production ( ...
* Chicago plan * The Chicago Plan Revisited * Committee on Monetary and Economic Reform *
Core inflation Core inflation represents the long run trend in the price level. In measuring long run inflation In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economic ...
* Debt levels and flows * Economics terminology that differs from common usage *
Fiat currency Fiat money (from la, fiat, ) is a type of money that is not backed by any commodity such as gold or silver, and typically declared by a decree A decree is a rule of law usually issued by a head of state A head of state (or chief of sta ...
*
Financial capital Financial capital (also simply known as capital or equity in finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contra ...
*
Float Float may refer to: Arts and entertainment Music Albums * ''Float'' (Aesop Rock album), 2000 * ''Float'' (Flogging Molly album), 2008 * ''Float'' (Styles P album), 2013 Songs * "Float", by Bush from '' Golden State'', 2001 * "Float," by Eden ...
*
Fractional-reserve banking Fractional-reserve banking is the system of banking A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of peo ...
* FRED (Federal Reserve Economic Data) * Full reserve banking *
Great ContractionThe Great Contraction is economist Milton Friedman Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist An economist is a practitioner in the social sciences, social science discipline of economics. The individual ...
*
Index of Leading Indicators The Conference Board Leading Economic Index is an American economic leading indicator intended to forecast future economic activity. It is calculated by The Conference Board The Conference Board, Inc. is a 501(c) organization, 501(c)(3) non-pro ...
– money supply is a component *
Inflation In economics, inflation refers to a general progressive increase in prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a r ...

Inflation
*
Monetarism Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply In macroeconomics, the money ...
*
Monetary base In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
*
Monetary economics Monetary economics is the branch of economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or ph ...
*
Monetary reform Monetary reform is any movement or theory that proposes a system of supplying money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose ...
* Money circulation *
Money creation Money creation, or money issuance, is the process by which the money supply In macroeconomics, the money supply (or money stock) refers to the total volume of money held by the public at a particular point in time in an economy. There are ...
*
Money market The money market is a component of the economy which provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less. As short-term securities became a commodity In economics Economic ...
*
Money demand In monetary economics Monetary economics is the branch of economics that studies the different competing theories of money: it provides a framework for analyzing money and considers its functions (such as medium of exchange, store of value and un ...
*
Liquidity preference__NOTOC__ In macroeconomic theory, liquidity preference is the demand for money In monetary economics Monetary economics is the branch of economics that studies the different competing theories of money: it provides a framework for analyzing ...
*
Seigniorage Seigniorage , also spelled seignorage or seigneurage (from the Old French Old French (, , ; Modern French French ( or ) is a Romance language The Romance languages, less commonly Latin or Neo-Latin languages, are the modern langua ...
*
Stagflation In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...


References


Further reading


Article in the New Palgrave on Money Supply
by
Milton Friedman Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist An economist is a professional and practitioner in the social science Social science is the branch The branches and leaves of a tree. A branch ( ...

Milton Friedman

Do all banks hold reserves, and, if so, where do they hold them? (11/2001)


* [http://research.stlouisfed.org/aggreg/ St. Louis Fed: Monetary Aggregates] *
Discontinuance of M3 Publication

Investopedia: Money Zero Maturity (MZM)


External links



* [https://fraser.stlouisfed.org/title/88 Historical H.3 releases]
Money Stock Measures (H.6)

U.S. MZM magnitude
an
velocity
used as a predictor of
inflation In economics, inflation refers to a general progressive increase in prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a r ...

inflation

Data on Monetary Aggregates in Australia



Monetary Survey
from People's Bank of China {{Authority control Monetary policy Inflation