Cash Ratio

Cash Ratio
See also


Cash ratio it is an indicator of measuring the amount of money in the economy. determines the measure of money supply (in statistical terms) in the national currency.

Depending on the degree of liquidity, four measures of money are distinguished, which are called as money aggregates. The aggregates of money are marked with the letter "M" and have the assigned number 1,2,3 are arranged chronologically from the most, to the least liquid aggregates.

Types of aggregates[edit]

  • Aggregate L

includes M3 and other liquid assets not covered by other measures, such as bank currency, commercial documents and Treasury bonds.

  • Aggregate M1

includes currency in cash held by the public, bills from which withdrawals can be made on demand or on the basis of checks, travelers' checks and other bank accounts to which checks may be issued. So these are the resources of money with the highest liquidity.

  • Aggregate M2

includes all M1 components as well as money market accounts and other high liquidity assets (savings deposits, small term deposits, overnight repurchase agreements, holdings in investment companies in the money market, short-term deposits in foreign currencies [1].

  • Aggregate M3

is the widest index showing the money supply. It is an aggregate stimulating M1 aggregate and M2 aggregate and savings money, which has a contractual term of notice of up to 3 months, and also operations with buy-back agreements between banks and the non-bank sector, and debt securities, for example bonds, medium-long and long-term securities with a maturity date up to 2 years (inclusive) issued by banks. This is the least liquid category of money. In Poland, the M3 aggregate includes the positions of the M2 aggregate plus repo operations and debt securities with a primary maturity of up to two years.

The value of the M3 aggregate results from the savings behavior of households and enterprises. The M3 aggregate is considered the best measure of domestic currency in a broad sense. Since March 2003, the M3 aggregate has been recognized by the National Bank of Poland as the main measure of the amount of money[2].

M3 aggregate in the Euro area[edit]

For the euro area, the M3 aggregate is the most important aggregate. The monetary analysis of the European Central Bank includes a regular assessment of the dynamics of the broad aggregate M3 and a number of other monetary and financial variables. Changes in M3 creation factors (such as cash in circulation or term deposits) are taken into account because they reflect the dynamics of the entire aggregate. In turn, narrower aggregates, e.g. M1, provide only certain information about the real sphere of the economy. The instruments included in M3 are close substitutes for deposits with liquidity and a stable price. Including them in a broad aggregate ensures its greater independence from the substitution effect of various categories of liquid assets than is the case with narrow monetary measures, as well as greater stability. On this basis, the amount of money supply in the zone is determined. This is an important element of the monetary policy of the European Central Bank[3].

References[edit]

Footnotes[edit]

  1. Results of a Study of the Stability of Cointegrating Relations Comprised of Broad Monetary Aggregates
  2. German monetary unification and the stability of the German M3 money demand function
  3. Does liquidity matter? Properties of a synthetic divisia monetary aggregate in the euro area

Author: Paulina Ściera