Broad money: Difference between revisions
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'''Broad [[money]] (or M3)''' is a measure of the total amount of money circulating in an economy. It includes all components of the narrow money supply (M1), such as currency and [[demand]] deposits, as well as additional forms of money such as time deposits and money [[market]] funds. It is an important measure of the availability of money in an economy and is closely watched by central banks and governments. Broad money is generally considered a better indicator of money supply than narrow money, as it provides a more comprehensive view of the types of money available for economic transactions. | |||
==Example of broad money== | |||
==Example of broad money == | |||
* '''Currency''': This includes physical notes and coins, as well as electronic forms such as debit cards and prepaid cards. | * '''Currency''': This includes physical notes and coins, as well as electronic forms such as debit cards and prepaid cards. | ||
* '''Demand deposits''': This is the money held in current accounts, such as checking accounts and savings accounts. | * '''Demand deposits''': This is the money held in current accounts, such as checking accounts and savings accounts. | ||
* '''Time deposits''': These are deposits held for a fixed period of time and usually pay higher interest rates than demand deposits. Examples include certificates of deposit (CDs) and term deposits. | * '''Time deposits''': These are deposits held for a fixed period of time and usually pay higher [[interest]] rates than demand deposits. Examples include certificates of deposit (CDs) and term deposits. | ||
* '''Money market funds''': These are mutual funds that invest in short-term debt instruments and other money market instruments. | * '''Money market funds''': These are mutual funds that invest in short-term debt instruments and other [[money market instruments]]. | ||
* '''Repurchase agreements''': These are agreements between two parties to buy and sell securities in the future. They are a form of short-term borrowing and are often used to raise capital and manage liquidity. | * '''Repurchase agreements''': These are agreements between two parties to buy and sell securities in the future. They are a form of short-term borrowing and are often used to raise capital and manage liquidity. | ||
==Formula of broad money == | ==Formula of broad money== | ||
The formula for calculating broad money (M3) is as follows: | The formula for calculating broad money (M3) is as follows: | ||
M3 = M1 + M2 + Other Deposits + Money Market Instruments + Government Deposits | M3 = M1 + M2 + Other Deposits + Money Market Instruments + [[Government]] Deposits | ||
Where: | Where: | ||
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M3 is a measure of the total amount of money circulating in an economy and can be used to assess the availability of money for economic transactions. It is generally considered a better indicator of money supply than M1 (narrow money) as it provides a more comprehensive view of the types of money available. M3 includes all components of M1, such as currency and demand deposits, as well as additional forms of money such as time deposits and money market funds. It is closely watched by central banks and governments, as it can be used to identify and address any potential issues in the money supply. | M3 is a measure of the total amount of money circulating in an economy and can be used to assess the availability of money for economic transactions. It is generally considered a better indicator of money supply than M1 (narrow money) as it provides a more comprehensive view of the types of money available. M3 includes all components of M1, such as currency and demand deposits, as well as additional forms of money such as time deposits and money market funds. It is closely watched by central banks and governments, as it can be used to identify and address any potential issues in the money supply. | ||
==When to use broad money == | ==When to use broad money== | ||
Broad money is often used by central banks and governments to assess the amount of money available in an economy. It can be used to inform decisions on the level of interest rates, the amount of credit available, and the level of economic activity. Broad money is also useful for analyzing the potential effects of changes in government policy on the money supply. Some of the key applications of broad money include: | Broad money is often used by central banks and governments to assess the amount of money available in an economy. It can be used to inform decisions on the level of interest rates, the amount of credit available, and the level of economic activity. Broad money is also useful for analyzing the potential effects of changes in government policy on the money supply. Some of the key applications of broad money include: | ||
* '''Analyzing the effects of monetary policy on economic activity''': Broad money can provide insight into how changes in monetary policy | * '''Analyzing the effects of monetary policy on economic activity''': Broad money can provide insight into how changes in monetary policy - such as changes in interest rates or the money supply - affect the level of economic activity. | ||
* '''Gauging potential inflationary pressures''': Broad money can be used to measure the amount of money available for economic transactions, which can provide an indication of whether inflationary pressures are likely to build. | * '''Gauging potential inflationary pressures''': Broad money can be used to measure the amount of money available for economic transactions, which can provide an indication of whether inflationary pressures are likely to build. | ||
* '''Assessing the level of economic activity''': Broad money can be used to measure the amount of money available for economic transactions, which can provide an indication of the level of economic activity. | * '''Assessing the level of economic activity''': Broad money can be used to measure the amount of money available for economic transactions, which can provide an indication of the level of economic activity. | ||
* '''Identifying money supply trends''': Broad money can provide insight into whether money supply is increasing or decreasing over time, which can be used to assess the potential impact of changes in government policy. | * '''Identifying money supply trends''': Broad money can provide insight into whether money supply is increasing or decreasing over time, which can be used to assess the potential impact of changes in government policy. | ||
==Advantages of broad money == | ==Advantages of broad money== | ||
Broad money is a measure of the total amount of money circulating in an economy, and is an important measure of the availability of money in an economy. There are several advantages to using broad money as an indicator of money supply, including: | Broad money is a measure of the total amount of money circulating in an economy, and is an important measure of the availability of money in an economy. There are several advantages to using broad money as an indicator of money supply, including: | ||
* It provides a more comprehensive picture of the types of money available for economic transactions, such as currency, demand deposits, time deposits and money market funds. | * It provides a more comprehensive picture of the types of money available for economic transactions, such as currency, demand deposits, time deposits and money market funds. | ||
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* It can provide a better understanding of the state of the economy, as it reflects the total amount of money in circulation. | * It can provide a better understanding of the state of the economy, as it reflects the total amount of money in circulation. | ||
==Limitations of broad money == | ==Limitations of broad money== | ||
Broad money is an important measure of the money supply and availability of money in an economy, but it is not without its limitations. These include: | Broad money is an important measure of the money supply and availability of money in an economy, but it is not without its limitations. These include: | ||
* '''Lack of precision''': Broad money does not provide a precise measure of the money supply and can be subject to wide fluctuations. | * '''Lack of precision''': Broad money does not provide a precise measure of the money supply and can be subject to wide fluctuations. | ||
* '''Excludes some types of money''': Broad money does not include all forms of money, such as large denomination deposits and foreign currency deposits, which can have a significant impact on the money supply. | * '''Excludes some types of money''': Broad money does not include all forms of money, such as large [[denomination]] deposits and foreign currency deposits, which can have a significant impact on the money supply. | ||
* '''Does not reflect changes in the value of money''': Broad money does not take into account changes in the value of money due to inflation or deflation, which can have a significant impact on the money supply and availability of money in an economy. | * '''Does not reflect changes in the value of money''': Broad money does not take into account changes in the value of money due to [[inflation]] or deflation, which can have a significant impact on the money supply and availability of money in an economy. | ||
* '''Time lag''': Broad money measures can be subject to significant delays in reporting, which can lead to inaccuracies in the data. | * '''Time lag''': Broad money measures can be subject to significant delays in reporting, which can lead to inaccuracies in the data. | ||
== | {{infobox5|list1={{i5link|a=[[Monetary aggregates]]}} — {{i5link|a=[[LIBID]]}} — {{i5link|a=[[Major currencies]]}} — {{i5link|a=[[Market performance]]}} — {{i5link|a=[[Financial exposure]]}} — {{i5link|a=[[Nominal exchange rate]]}} — {{i5link|a=[[Market condition]]}} — {{i5link|a=[[Net Borrower]]}} — {{i5link|a=[[Interest rate parity]]}} }} | ||
==References== | |||
* Berry, S., Harrison, R., Thomas, R., & de Weymarn, I. (2007). ''[https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2007/interpreting-movements-in-broad-money.pdf Interpreting movements in broad money]''. Bank of England Quarterly Bulletin Q, 3, 2007. | * Berry, S., Harrison, R., Thomas, R., & de Weymarn, I. (2007). ''[https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2007/interpreting-movements-in-broad-money.pdf Interpreting movements in broad money]''. Bank of England Quarterly Bulletin Q, 3, 2007. | ||
* Goodfriend, M. (2005). ''[https://core.ac.uk/download/pdf/6705885.pdf Narrow money, broad money, and the transmission of monetary policy]''. Models and Monetary Policy: Research in the Tradition of Dale Henderson, Richard Porter, and Peter Tinsley. Board of Governors of the Federal Reserve System. | * Goodfriend, M. (2005). ''[https://core.ac.uk/download/pdf/6705885.pdf Narrow money, broad money, and the transmission of monetary policy]''. Models and Monetary Policy: Research in the Tradition of Dale Henderson, Richard Porter, and Peter Tinsley. [[Board]] of Governors of the Federal Reserve [[System]]. | ||
* Ericsson, N. R., Hendry, D. F., & Prestwich, K. M. (1998). ''[https://www.federalreserve.gov/Pubs/ifdp/1997/596/ifdp596.pdf The demand for broad money in the United Kingdom, | * Ericsson, N. R., Hendry, D. F., & Prestwich, K. M. (1998). ''[https://www.federalreserve.gov/Pubs/ifdp/1997/596/ifdp596.pdf The demand for broad money in the United Kingdom, 1878-1993]''. Scandinavian Journal of [[Economics]], 100(1), 289-324. | ||
[[Category:Macroeconomics]] | [[Category:Macroeconomics]] | ||
Latest revision as of 17:33, 17 November 2023
Broad money (or M3) is a measure of the total amount of money circulating in an economy. It includes all components of the narrow money supply (M1), such as currency and demand deposits, as well as additional forms of money such as time deposits and money market funds. It is an important measure of the availability of money in an economy and is closely watched by central banks and governments. Broad money is generally considered a better indicator of money supply than narrow money, as it provides a more comprehensive view of the types of money available for economic transactions.
Example of broad money
- Currency: This includes physical notes and coins, as well as electronic forms such as debit cards and prepaid cards.
- Demand deposits: This is the money held in current accounts, such as checking accounts and savings accounts.
- Time deposits: These are deposits held for a fixed period of time and usually pay higher interest rates than demand deposits. Examples include certificates of deposit (CDs) and term deposits.
- Money market funds: These are mutual funds that invest in short-term debt instruments and other money market instruments.
- Repurchase agreements: These are agreements between two parties to buy and sell securities in the future. They are a form of short-term borrowing and are often used to raise capital and manage liquidity.
Formula of broad money
The formula for calculating broad money (M3) is as follows:
M3 = M1 + M2 + Other Deposits + Money Market Instruments + Government Deposits
Where:
M1 = Currency in Circulation + Demand Deposits
M2 = M1 + Savings Deposits + Time Deposits
Other Deposits = Deposits of Financial Corporations + Deposits of Non-Financial Corporations + Household Deposits
Money Market Instruments = Commercial Papers + Negotiable Certificates of Deposits + Repurchase Agreements + Money Market Mutual Funds
Government Deposits = Deposits of Central Government + Deposits of State and Local Governments
M3 is a measure of the total amount of money circulating in an economy and can be used to assess the availability of money for economic transactions. It is generally considered a better indicator of money supply than M1 (narrow money) as it provides a more comprehensive view of the types of money available. M3 includes all components of M1, such as currency and demand deposits, as well as additional forms of money such as time deposits and money market funds. It is closely watched by central banks and governments, as it can be used to identify and address any potential issues in the money supply.
When to use broad money
Broad money is often used by central banks and governments to assess the amount of money available in an economy. It can be used to inform decisions on the level of interest rates, the amount of credit available, and the level of economic activity. Broad money is also useful for analyzing the potential effects of changes in government policy on the money supply. Some of the key applications of broad money include:
- Analyzing the effects of monetary policy on economic activity: Broad money can provide insight into how changes in monetary policy - such as changes in interest rates or the money supply - affect the level of economic activity.
- Gauging potential inflationary pressures: Broad money can be used to measure the amount of money available for economic transactions, which can provide an indication of whether inflationary pressures are likely to build.
- Assessing the level of economic activity: Broad money can be used to measure the amount of money available for economic transactions, which can provide an indication of the level of economic activity.
- Identifying money supply trends: Broad money can provide insight into whether money supply is increasing or decreasing over time, which can be used to assess the potential impact of changes in government policy.
Advantages of broad money
Broad money is a measure of the total amount of money circulating in an economy, and is an important measure of the availability of money in an economy. There are several advantages to using broad money as an indicator of money supply, including:
- It provides a more comprehensive picture of the types of money available for economic transactions, such as currency, demand deposits, time deposits and money market funds.
- It is more reliable and comprehensive than narrow money, which only includes currency and demand deposits.
- It is closely monitored by central banks and governments, who use it to develop policy and monitor economic trends.
- It can provide a better understanding of the state of the economy, as it reflects the total amount of money in circulation.
Limitations of broad money
Broad money is an important measure of the money supply and availability of money in an economy, but it is not without its limitations. These include:
- Lack of precision: Broad money does not provide a precise measure of the money supply and can be subject to wide fluctuations.
- Excludes some types of money: Broad money does not include all forms of money, such as large denomination deposits and foreign currency deposits, which can have a significant impact on the money supply.
- Does not reflect changes in the value of money: Broad money does not take into account changes in the value of money due to inflation or deflation, which can have a significant impact on the money supply and availability of money in an economy.
- Time lag: Broad money measures can be subject to significant delays in reporting, which can lead to inaccuracies in the data.
| Broad money — recommended articles |
| Monetary aggregates — LIBID — Major currencies — Market performance — Financial exposure — Nominal exchange rate — Market condition — Net Borrower — Interest rate parity |
References
- Berry, S., Harrison, R., Thomas, R., & de Weymarn, I. (2007). Interpreting movements in broad money. Bank of England Quarterly Bulletin Q, 3, 2007.
- Goodfriend, M. (2005). Narrow money, broad money, and the transmission of monetary policy. Models and Monetary Policy: Research in the Tradition of Dale Henderson, Richard Porter, and Peter Tinsley. Board of Governors of the Federal Reserve System.
- Ericsson, N. R., Hendry, D. F., & Prestwich, K. M. (1998). The demand for broad money in the United Kingdom, 1878-1993. Scandinavian Journal of Economics, 100(1), 289-324.
