Thursday, July 27, 2006

Monetary aggregates


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).


b v n said...


very informative blog.hope wudnt mind linking yr blog.

alex said...

Thank you. No, I would not mind the link.

Anonymous said...

What about M5!

I've been trying to research M4 and M5 for an email rant about last year's burial of M3 reporting by the Fed, but the previous burial during the Reagan administration, of M4 and M5 reporting has all but swept any information about M4 and M5 from the web (especially as the web did not exist back then!). I may have to actually venture out into the Big Blue Room and visit a library of physical paper books!

I would have thought that such concepts would be more difficult to erase than they apparently are.

alex said...


I didn't even know M5 existed!


Clinton said...

great blog site mate, a lot of interesting info, cheers

alex said...


You could visit my wordpress blog for more info.

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