Money Supply and Aggregates

Since GFC, central banks have injected trillions of dollars into the system in order to stimulate the economy and avoid a global liquidity crisis. We are now aware of how much important is the money supply for the financial markets as guru Bill ‘PIMCO’ Gross once wrote it in one of its Investment Outlook review: ‘There are bubbles everywhere…’ (Bond, equity or property).

However, even if we have a vague idea of the definition of ‘money supply’, which we would usually describe as the amount of money in the economy, let’s review the different ways to define ‘money’.

If we have a look at the ECB’s website for instance, we can find three different Euro area monetary aggregates:

  • M1: Narrow aggregate or ‘narrow money’ which takes into account the currency (notes and coins) in circulation in addition to overnight deposits (balances which can immediately be converted into currency or used for cash payments.
  • M2: Intermediate aggregate or ‘intermediate money’ comprises M1, deposits with an agreed maturity up to 2 years (non-transferable deposits which cannot be converted into currency before an agreed fixed term without penalty) and deposits redeemable at notice.
  • M3: Broad aggregate or ‘broad money’ comprises M1, M2, repurchase agreements, Money Market Fund (MMF) shares/units and debt securities up to 2 years.


 (Source: ECB website)

In the US, the Fed only publishes the M1 and M2 aggregates, as they announced they would cease publication of M3 in the spring of 2006:

  • M1: Total amount of cash/coins outside of the private banking system in addition to the amount of demand deposits, traveller’s checks and other checkable deposits.
  • M2 comprises M1 plus most saving accounts, money market accounts, retail MM mutual funds, and small denomination time deposits (CDs of under $100,000).

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