Broad money

In economics, broad money is a term denoting a certain measure of the amount of money (of the money supply) in a national economy, and it is used depending on the local practice.[1]

Definition

The European Central Bank considers all monetary aggregates from M2 upwards to be part of broad money.[2] Typically, "broad money" refers to M2, M3, and/or M4.[1]

The term "narrow money" typically covers the most liquid forms of money, i.e. currency (banknotes and coins) as well as bank-account balances that can immediately be converted into currency or used for cashless payments (overnight deposits, checking accounts, etc).[3] It is typically denoted as M1.[3] Narrow money is a subset of broad money.

Deposits in foreign currency are excluded from all monetary aggregates by most countries, or they are included only in broad money, with some exceptions.[4]

OECD defines "broad money" as: all banknotes and coins; bank deposits not considered long term, i.e. with an agreed maturity of up to 2 years; bank deposits redeemable at notice of up to 3 months, and similar repurchase agreements; money-market fund shares or units; and debt securities maturing within a period of up to 2 years. The typical OECD notation for "broad money" is M3.[5]

Still, the exact definitions of monetary measures depend on the country.[1] The terms will usually be more exactly defined before a discussion, whenever it is not sufficient to assume a wider definition.[6] For the Bank of England, the "inescapable conclusion" is that "there can be no unique definition of 'broad money' and any choice of [a] dividing line between those financial assets included in, and those excluded from, broad money is to a degree arbitrary, and is likely over time to be invalidated by developments in the financial system."[7] Generally, "broad money" is more a term and less a fixed definition across all situations.[8]

However defined in a specific country, the importance of monitoring the development of broad money has been recognized.[7]

References

  1. 1 2 3 Definition of M0, M1, M2, M3, M4, Financial Times Lexicon
  2. ↑ "Data on the broad monetary aggregate M2 in the US has been subject to several re-definitions" in Calza, Alessandro & João Sousa (2003) "Why has broad money demand been more stable in the Euro area than in other economies?", ECB working paper no.261, September 2003, p. 13 n12
  3. 1 2 M1 definition, OECD Data
  4. ↑ O’Brien, Yueh-Yun (2006) "Measurement of Monetary Aggregates Across Countries", Division of Monetary Affairs, Federal Reserve Board, Washington, D.C., 25 November 2006
  5. ↑ Broad money, OECD Data
  6. ↑ Lim, Ewe-Ghee; Sriram, Subramanian (2003). "Factors Underlying the Definitions of Broad Money: An Examination of Recent U.S. Monetary Statistics and Practices of Other Countries" (PDF). IMF. SSRN 879137.
  7. 1 2 "Measures of broad money", Bank of England Quarterly Bulletin, 1986 Q2, pp. 212.219
  8. ↑ McPhail, Kim (2010) "Broad Money: A Guide for Monetary Policy," Bank of Canada, October 2010
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