Definition
M3 is a comprehensive and broad measure of a country’s money supply. It includes M2, which itself consists of M1 (physical currency and demand deposits) plus savings accounts, small time deposits, and retail money market funds. In addition to these, M3 encompasses large time deposits, institutional money market funds, and other larger liquid assets. It’s a more inclusive measure that provides insights into the total money within an economy, capturing a wide array of near-cash financial assets.
Formally, we can express M3 as:
Components of M3
M2
- M1: Currency in circulation (coins and bills) and demand deposits (checking accounts).
- Savings Accounts: Accounts that accrue interest but are not used for transactions.
- Small Time Deposits: Certificates of deposit with smaller denominations and short-term maturities.
- Retail Money Market Funds: Investment funds that retail investors use.
Large Time Deposits
Large time deposits, typically denominated in large amounts, have fixed terms and earn interest over their period. They are less liquid compared to small time deposits.
Institutional Money Market Funds
These are investment funds used by institutions. They provide high liquidity and typically invest in short-term, high-quality financial instruments.
Other Larger Liquid Assets
Other components can include repurchase agreements, commercial paper, and eurodollar deposits which are not easily transferred into currency but are liquid in nature.
Historical Context
M3 was widely used as an indicator of money supply and economic health until certain central banks, including the Federal Reserve in the United States, ceased reporting it in the mid-2000s. Despite its non-reporting, M3 is still considered by many economists an important measure.
Applicability in Economic Analysis
M3 provides a thorough understanding of economic liquidity. While M1 and M2 give insights about day-to-day and slightly longer-term financial activity, M3 encompasses a broader range of financial assets, giving a fuller picture of the overall money in the system.
Comparisons and Related Terms
M1 vs. M2 vs. M3
- M1: The most liquid forms of money, including cash and demand deposits.
- M2: M1 plus savings accounts, small time deposits, and other near-money instruments.
- M3: Adds to M2 by including larger deposits and institutional money markets.
Frequently Asked Questions (FAQs)
Why did the Federal Reserve stop reporting M3?
The Federal Reserve ceased reporting M3 in 2006, citing that M3 did not provide significantly different information compared to M2. However, views differ among economists regarding the importance and utility of M3.
Is M3 still relevant?
Yes, even if not reported by some central banks, M3 remains a useful measure for understanding broader economic liquidity and potentially foreshadowing inflation or deflation trends.
References
- Federal Reserve Statistical Releases.
- International Monetary Fund (IMF) Financial Data and Statistics.
- Various Economic Textbooks on Monetary Theory and Policy.
Summary
M3 is a broad monetary measure that includes M2, large time deposits, institutional money market funds, and other larger liquid assets. This measure provides a comprehensive overview of the money supply and liquidity within an economy. Despite not being reported by some central banks, M3 continues to be a valuable metric for understanding the broader economic environment.
