Monetary aggregates
Monetary aggregates are measures of the money supply in an economy. They are used to measure the total amount of money in circulation in the economy, and to assess the impact of monetary policy on the money supply. Monetary aggregates usually include cash, deposits, currency, and other money market instruments.
- Cash: Cash refers to physical currency, coins, and paper money. It is the most liquid form of money and is generally accepted as a medium of exchange.
- Deposits: Deposits are funds held in bank accounts, such as checking and savings accounts. These deposits are usually used as a source of credit and are easily accessible.
- Currency: Currency is defined as the money issued by a central bank or government. It is the most widely accepted form of money and is used for payments, investments, and other transactions.
- Money market instruments: Money market instruments are financial instruments used in the money market, such as Treasury bills, commercial paper, certificates of deposit, and repurchase agreements. These instruments are used to raise funds and provide liquidity in the money market.
Example of Monetary aggregates
M1 is a measure of the total amount of money in circulation in the economy, and is typically used to assess the impact of monetary policy on the money supply. It includes currency, which is physical cash, coins, and paper money; demand deposits, which are funds held in bank accounts such as checking and savings accounts; and other checkable deposits, which include money market instruments such as Treasury bills and certificates of deposit.
Formula of Monetary aggregates
M1 = Currency + Demand deposits + Other checkable deposits
M2 = M1 + Savings deposits + Money market mutual funds
M3 = M2 + Large time deposits + Repurchase agreements + Eurodollars
In conclusion, the three most commonly used monetary aggregates are M1, M2, and M3. M1 is the narrowest measure of money and includes currency, demand deposits, and other checkable deposits. M2 includes all the components of M1 plus savings deposits and money market mutual funds. Finally, M3 includes all the components of M2 plus large time deposits, repurchase agreements, and Eurodollars.
When to use Monetary aggregates
Monetary aggregates are used to measure the total amount of money in circulation in the economy and to assess the impact of monetary policy on the money supply. Furthermore, monetary aggregates can be used to track changes in the availability of money and to identify potential economic trends. For example, if the money supply is increasing, this may indicate that the economy is growing, while if the money supply is decreasing, this may indicate that the economy is slowing down. Additionally, monetary aggregates can be used to assess the effectiveness of government policies, such as quantitative easing, and to identify potential areas of risk in the economy.
Types of Monetary aggregates
There are three types of monetary aggregates, namely M1, M2, and M3. M1 includes cash, demand deposits, and other checkable deposits. M2 includes M1 plus savings deposits, time deposits, and money market mutual funds. M3 includes M2 plus large time deposits, repurchase agreements, and Eurodollars.
M1 refers to the most liquid form of money and includes cash, demand deposits, and other checkable deposits. It is the shortest measure of the money supply and is closely watched by economists as an indicator of economic activity. M2 includes M1 plus savings deposits, time deposits, and money market mutual funds. It is a broader measure of the money supply and is used to assess the impact of monetary policy on the economy. M3 includes M2 plus large time deposits, repurchase agreements, and Eurodollars. It is the broadest measure of the money supply and is generally used to assess the impact of long-term economic trends.
Steps of calculating Monetary aggregates
The steps of calculating monetary aggregates involve collecting data on the various components of the money supply, such as cash, deposits, currency, and money market instruments. The data is then used to calculate the total amount of money in circulation.
- Collect data: The first step in calculating monetary aggregates is to collect data on the various components of the money supply. This includes data on cash, deposits, currency, and money market instruments.
- Calculate total: Once the data is collected, the total amount of money in circulation can be calculated. This can be done by summing the values of the various components of the money supply.
- Analyze impacts: The monetary aggregates can then be used to analyze the impact of monetary policy on the money supply. This can be done by tracking changes in the aggregates over time, in order to measure the effects of the policy.
Advantages of Monetary aggregates
Monetary aggregates are useful for tracking the impact of monetary policy on the money supply. They provide a comprehensive view of the money supply and can be used to assess the overall health of the economy. Additionally, monetary aggregates can be used to forecast future economic activity and to identify trends in the money supply.
- Provide comprehensive view of money supply: Monetary aggregates provide a comprehensive view of the money supply in an economy, allowing economists and policy makers to track the impact of monetary policy on the money supply.
- Forecast future economic activity: By tracking changes in the money supply, monetary aggregates can be used to forecast future economic activity and identify trends in the money supply.
- Identify trends in money supply: Monetary aggregates can be used to identify trends in the money supply, such as changes in the availability of money in circulation and changes in the amount of money used for transactions.
Limitations of Monetary aggregates
One of the main limitations of monetary aggregates is that they do not provide an accurate picture of the money supply in the economy. This is because some forms of money, such as the shadow banking system and off-balance sheet activities, are not included in the monetary aggregates. Additionally, different countries have different definitions of what constitutes money, making it difficult to compare the money supply across countries. Furthermore, monetary aggregates do not account for changes in the velocity of money, which is the rate at which money is exchanged in the economy.
The other approaches related to monetary aggregates include the Quantity Theory of Money, the Divisia Monetary Index, and the Divisia Financial Aggregates.
- Quantity Theory of Money: The Quantity Theory of Money is an economic theory which states that the quantity of money in circulation is related to the general price level in an economy. This theory is used to explain the effects of changes in the money supply on inflation and economic growth.
- Divisia Monetary Index: The Divisia Monetary Index is a measure of the total money supply in an economy. It is calculated by taking the weighted sum of different components of the money supply and is used to measure the impact of monetary policy on the money supply.
- Divisia Financial Aggregates: The Divisia Financial Aggregates are measures of the financial assets held by households, businesses, and the government. These aggregates are used to assess the impact of changes in the financial system on the overall economy.
In conclusion, there are other approaches related to monetary aggregates such as the Quantity Theory of Money, the Divisia Monetary Index, and the Divisia Financial Aggregates. These approaches are used to assess the impact of changes in the money supply and financial system on the overall economy.
| Monetary aggregates — recommended articles |
| Broad money — Major currencies — Interest rate parity — Net Borrower — Economic climate — Nominal exchange rate — Effective exchange rate — Market performance — National income measures |
References
- Nelson, E. (2003). The future of monetary aggregates in monetary policy analysis. Journal of Monetary Economics, 50(5), 1029-1059.
- Freeman, S., & Kydland, F. E. (2000). Monetary aggregates and output. American Economic Review, 90(5), 1125-1135.
- Estrella, A., & Mishkin, F. S. (1997). Is there a role for monetary aggregates in the conduct of monetary policy?. Journal of monetary economics, 40(2), 279-304.
