What is M3?

A measure of the money supply known as M3 considers not only M2 but also substantial time deposits, institutional money market funds, more considerable liquid assets, and short-term repurchase agreements (repo). Assets referred to as “near money,” which are less liquid than other parts of the money supply and more closely associated with the finances of larger financial institutions and companies than small firms and individuals, are included in the M3 assessment.

Recognizing M3

There are numerous categories of liquidity within the money supply, often known as the money stock. All the money in circulation plus liquid financial assets like certificates of deposit (CDs) are included in the total money supply.

The broadest indicator of an economy’s money supply is the M3 categorization. Because of this emphasis on money as a store of value rather than a medium of exchange, less-liquid assets are included in M3. Assets that are difficult to convert into cash and are hence not immediately usable when needed are considered less liquid.

Historically, central banks have used M3 to direct monetary policy to control inflation, consumption, growth, and liquidity over medium- and long-term periods. Economists have also used M3 to calculate the total money supply in an economy.

Every M3 component is calculated with equal weight to determine M3. For instance, M2 and considerable time deposits are pooled and handled identically. This simplifies the computation, but it assumes that each M3 component has the same economic impact, which is untrue.

The M3 measurement of the money supply is no longer accepted as a valid measure because of this equal weighting, which might be seen as a flaw in the measurement.

Misuse of the M3

The Federal Reserve, the U.S. central bank, has not tracked M3 since 2006. Before that, mainly in the 1980s, the Fed used M2 to inform policy. Fed Chairman Alan Greenspan declared in 1993 that any money aggregates, including M2, would no longer guide F.O.M.C. policy. The Federal Reserve Bank of St. Louis and a few other sources continue to release M3 figures for economic data.

M3 and Additional M Categorizations

All of the previous money classes (M0, M1, and M2) and the less liquid parts of the money supply can be combined to form M3. The currency in use, such as coins and cash, is M0. M0, demand deposits (such as checking and savings accounts), traveler’s checks, and easily accessible but out-of-circulation money are all included in M1.

Savings deposits and certificates of deposit, which are less liquid than checking accounts, are included in M2, along with all of M1 and M0. M3 consists of all M2 (and M1 and M0) plus the least liquid, non-circulating parts of the money supply, like repurchase agreements with days and weeks-to-mature maturities.

M1, M2, and M3 Money: What Is It?

In the U.S., there are three different categories of money: M1, M2, and M3. M1 is made up of bank deposits and all the money in circulation. M2 money consists of money market funds, savings accounts, and M1 money. M2 plus time deposits are included in M3, which has been discontinued.

Describe M4 Money.

In the UK, money circulated among the general population, non-financial entities, retail and wholesale banks in the private sector, and building society deposits is categorized as M4 money.

How Much Currency Is in Use Right Now?

The seasonally adjusted total amount of money in circulation as of July 2023 is $18.4 trillion. All other money categories, including M0, M1, M2, and other parts of the money supply, are included in the Bottom Line M3 classification of money. Although the Fed stopped publishing it in 2006, copies are still available for other sources to use for historical comparisons.

Conclusion

• M3 is a money supply collection comprising M2 money, substantial time deposits, institutional money market funds, short-term repurchase agreements, and more considerable liquid funds.
• M3 is more closely related to huge financial organizations and corporations than small enterprises and people.
• Economists have traditionally used M3 to assess an economy’s total money supply and by governments to influence policy and manage inflation over medium and long-term timeframes.
• The Fed has not published the M3 money aggregate since 2006, but other sources continue to do so.