Broad money

In economics, broad money is a measure of the amount of money, or money supply, in a national economy including both highly liquid "narrow money" and less liquid forms. The European Central Bank, the OECD and the Bank of England all have their own different definitions of broad money.[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. Definition of M0, M1, M2, M3, M4 Archived 2018-03-07 at the Wayback Machine, 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. 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. Cite journal requires |journal= (help)
  7. "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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