Money aggregates (M0, M1, M2, M3)

What are monetary aggregates?

Monetary aggregates are statistical measures of the quantity of money that allow central banks to determine monetary policy objectives. They also allow central banks to set monetary policy objectives and subject them to regular evaluation. As a result, banks can control the degree to which a particular value of cash is traded – including in the secondary market.

How are monetary aggregates divided?

They are divided into four groups: M0, M1, M2, M3. Each group specifies money from different categories.

M0 aggregate – what are its characteristics?

The aggregate M0 is commonly referred to as “big-power money,” defining the narrowest definition of money. It defines the amount of money that can be used immediately for cash transactions.

Defined by the formula

It combines the non-cash money of commercial banks (denoted “R”), which is in the accounts of the central bank, and the cash money in circulation outside the banks (denoted “C”) – according to the formula M0 = R + C.

M0 aggregate highlights

Key components of the aggregation include:

• The value of reserve requirement accounts,
• The value of the current accounts of all commercial banks located within the central bank’s operations, through which it makes daily settlements with the National Bank of Poland (NBP),
• The value of cash money circulating in the economy.

M1 aggregate – what are its characteristics?

The M1 aggregate helps determine liquidity in financial markets. It is considered a basic measure of the money supply, which corresponds to the narrowest definition of money. It includes in its definition cash money in circulation outside bank counters, the value of demand deposits (sight account) of individuals, business entities, companies and financial institutions.

What distinguishes the M1 aggregate?

It is primarily an aggregate characterized by the highest degree of liquidity among the monetary aggregates used. This category also includes deposits with “over-night”, or 24-hour terms.

Why is the M1 aggregate very often called transaction money?

First of all, because of the possibility of immediate execution of a monetary transaction, such as making a transfer. The amount of money inside the M1 aggregate is the value that allows the execution of payment transactions, thus bringing money to the fore as a means of payment.

What are the components of the M1 aggregate?

It primarily includes cash in circulation (excluding bank tellers, where money is frozen as a reserve), as well as current deposits, including overnight deposits, that is, of households, businesses, non-monetary financial institutions, local government institutions, social security funds and non-commercial institutions acting for government households.

M2 aggregate – what are its characteristics?

The M2 aggregate is considered the primary measure of the world’s money supply. It is made up of cash in circulation and time deposits in commercial banks with an original term of no more than 2 years, and deposits with a notice period of up to 3 months, such as bills of exchange or short-term money bills.

Why does the M2 aggregate have lower fluidity than the M1 aggregate?

This is primarily related to the timeliness of making deposits. Despite the possibility of breaking them in the course, this operation is very often associated with the loss of accrued interest. Therefore, the use of this type of money to regulate current transactions is associated with higher costs than in the case of the M1 aggregate.

What goes into the M2 aggregate?

The M2 aggregate primarily includes savings, which is the primary credit capacity of the banking sector. The aggregate of the quantity of M2 money also includes the term deposits of economic agents, which, due to interest rates, are placed in banks, the terms of which are aligned with the terms of future payment obligations.

They can also be treated as a means of payment.

Contents of the M2 aggregate

• deposits and other liabilities of banks to non-banks with an initial maturity of up to 2 years,
• Savings deposits (due to the term),
• short-term deposits in foreign currencies,
• deposits in banks and similar institutions – payable on demand, so-called current deposits,
• Cash money, which is beyond the reach of the banking sector,
• small term accounts,
• One-day repurchase agreements (scheme of operations: the Central Bank sells securities and agrees to repurchase them the following day at a specified price),
• shares in money market investment companies, i.e. deposits that yield a certain percentage and allow the issuance of checks for less than what was originally agreed upon.

M3 aggregate – what are its characteristics?

The M3 aggregate is the broadest indicator for measuring the amount of money in the economy. Much broader than the aggregate of M1 and M2, which it stimulates.

M3 aggregate in Poland vs. the world – differences

Admittedly, in Poland the difference between the M2 aggregate and the M3 aggregate is small. This is mainly due to low interest rates on bank deposits. In Britain, on the other hand, people, thanks to handling less cash than on the Continent and in the United States and larger aggregates, have a much more developed retail banking system.

In Poland, the M3 aggregate also includes items in the M2 aggregate, plus repurchase operations and debt securities with original maturities of up to and including two years.

What goes into the M3 unit?

• Deposits with a notice period of up to and including 3 months,
• Forward repurchase agreements longer than 1 day,
• cash money, being outside the circulation of the banking sector,
• deposits and other liabilities of banks to non-banks with an initial maturity of up to 2 years,
• deposits in banks and similar institutions payable on demand so-called current deposits,
• long-term deposits in foreign currencies.