Monetary aggregates

Money

Economists have proposed a functional definition of money, i.e. any object that is generally acceptable in facilitating the exchange of goods and services.
It took me a lot of time to come up with the meanings of the monetary aggregates in the Indian context. This post gives an idea about the composition of various monetary aggregates. These aggregates are commonly used in journals relating to economics, so these definitions will help in comprehending the data better.

What are M1 and M3?

M1 and M3 are standard measures of money supply. Other standard measures are M0 and M4. Each monetary aggregate is ranked according to the degree of liquidity it provides. Monetary aggregates measure the amount of money circulating in an economy.

M0 includes only currency in the hands of the public, banks’ statutory reserve deposits held at the central bank and banks’ cash reserves. In India it is usually referred to as reserve money. It is controlled by the central bank of the country. (Link:RBI)

Narrow money (M1) is the sum of currency in circulation and demand deposits at monetary institutions.

Monetary aggregate (M2) is defined as M1 plus post office savings, bank deposits and residents’ deposits in foreign currency at deposit money banks.

M3 is defined as M2 plus other time deposits with banks. The components of M3 vary between countries. It is also called broad money.

M4 or L is referred to as very broad money. It comprises M3 plus treasury bills, negotiable bonds and pension funds.

Narrow money measures cover highly liquid forms of money (money as a means of exchange) while broad money includes the less liquid forms (money as a store of value).

2 thoughts on “Monetary aggregates

  1. I vaguely remember long back the one unknowingly i told to few people around me how RBI can control money supply (M1). If there is pressure for currency (less number of legal notes for people to transact) RBI can buy Gold from open market to issue new currency and reduce the pressure on money demand. And if there is an excess money in the system, in order to contain it (or to contain inflation) RBI can sell Gold in open market (or to banks) and take away currency (M1) from the system.

    Currently instead of Gold, the same is carried by 10/20/30 year RBI backed bonds.

    All was my guess, I’m pretty sure, it would hold in general context, i never bothered to verify my claim.

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