M3
M3 is a measure of the money supply that includes M2 as well as large time deposits, institutional money market funds, short-term repurchase agreements (repo), and larger liquid assets.
The M3 measurement includes assets that are less liquid than other components of the money supply and are referred to as "near money," which are more closely related to the finances of larger financial institutions and corporations than to those of small businesses and individuals.
What is M3
M3 is a measure of the money supply that includes M2 as well as large time deposits, institutional money market funds, short-term repurchase agreements (repos), and larger liquid assets. M3 encompasses less liquid assets compared to other components of the money supply, often referred to as 'near money,' and is more closely related to the financial status of large financial institutions and corporations rather than small businesses and individuals.
Origin
The concept of M3 originated in the mid-20th century when central banks recognized the need for a more comprehensive measure of the money supply to better understand and manage economic activity. As financial markets became more complex, M3 gradually became an important indicator for measuring the money supply.
Categories and Characteristics
M3 mainly includes the following types of assets:
- M2: Includes cash, demand deposits, savings deposits, and small time deposits.
- Large Time Deposits: Typically refers to larger, longer-term deposits with lower liquidity.
- Institutional Money Market Funds: Funds managed by financial institutions that invest in short-term, highly liquid financial instruments.
- Short-term Repurchase Agreements (repos): A short-term financing tool usually used for fund allocation between financial institutions.
- Larger Liquid Assets: Includes other assets that are not part of the above categories but have a certain degree of liquidity.
The characteristic of M3 is that it includes more less liquid assets, thus providing a more comprehensive reflection of the money supply in the economy.
Specific Cases
Case 1: During the 2008 financial crisis, the Federal Reserve System (Fed) monitored changes in M3 and found a severe lack of market liquidity. This led to a series of quantitative easing policies, injecting large amounts of funds into the market to stabilize the financial system.
Case 2: In Europe, the European Central Bank (ECB) also uses M3 as one of the reference indicators for monetary policy. By observing the growth rate of M3, the ECB can better predict inflation and economic growth trends, thereby adjusting interest rate policies.
Common Questions
Question 1: Why is M3 more important than M1 and M2?
Answer: M3 includes more less liquid assets, providing a more comprehensive reflection of the money supply in the economy, especially the financial status of large financial institutions and corporations.
Question 2: Why do some countries no longer publish M3 data?
Answer: Some countries find the cost of compiling and monitoring M3 data to be high and believe its guidance for monetary policy is limited, thus choosing not to publish M3 data.
