What is broad money?

Broad money, which usually refers to M3, is a measure of a country’s money supply that includes more than simply physical money such as banknotes and coins (narrow money). It is the most inclusive definition of the money supply. It also includes bank money (demand deposits at commercial banks), and any cash held in easily accessible accounts.

Broad money consists of components that are still very liquid, while the non-cash components can be rapidly converted into cash.

There is no unique ‘correct’ measure of a country’s money supply. What economists have are several measures which are classified along a spectrum between narrow or broad monetary aggregates.

Broad MoneyBroad money was increasing rapidly in most advanced economies, except for Japan, until the 2007/2008 global financial crisis struck – after which it declined considerably. (Data Source: The Economist)

Narrow money supply (narrow money) refers to the most liquid assets, cash (notes and coins) and checkable deposits, while broader money also includes less liquid types of assets, such as certificates of deposit.

Economists say that monetary-policy actions generally affect and control narrow money more than broader measures.



 

Broad money usually means M3

Broad money, which is loosely-used term, generally means the same as M3.

M3 includes coins and currency, deposits in checking and savings accounts, small time deposits, non-institutional money market accounts, and overnight repos (a form of short-term borrowing) at commercial banks.

M3 is the main measure of the money supply. It is the economic indicator generally used to determine the amount of liquidity in an economy.

However, broad money can have several different meanings, depending on the context in which it is used. In most cases it means the same as M3, but might also be used to refer just to the least liquid forms of money.

In many academic papers, the author will define broad money at the beginning of the article.

According to the Bank of England, in the UK broad money refers to the M4 money supply.

The OECD (Organization for Economic Cooperation and Development) says the following about broad money supply:

“Broad money supply, in addition to currency in circulation plus sight deposits held by domestic non-banks, also include time deposits as well as savings deposits at short-notice held by domestic non-banks.”

Video – Broad Money Supply M3