Monetary Aggregates

What are 'Monetary Aggregates'

Money aggregates are broad categories that measure the money supply in an economy. In the United States, the standardized monetary aggregates are labeled M0 (physical paper and coin), M1 (all of M0 plus travelers checks and demand deposits), M2 (all of M1, money market shares and savings deposits); an aggregate known as M3 (which includes time deposits over $100,000 and institutional funds) has not been tracked by the Federal Reserve since 2006 but is still calculated broadly by analysts.

BREAKING DOWN 'Monetary Aggregates'

One additional aggregate is the monetary base (MB), which differs from money supply. The MB aggregate is not widely observed. It includes not only the total supply of money in circulation but specifically includes the portion of commercial banks' reserves that are stored within the central bank.

The Federal Reserve uses money aggregates as a metric for how open-market operations – like trading in Treasury securities or changing the discount rate – affect the economy. Investors and economists observe the aggregates closely because they offer a more accurate depiction of the actual size of a country’s working money supply. Because M1 and M2 data is reported on a weekly basis, investors are able to measure the money aggregates' rate of change and monetary velocity overall.

Impact

Studying monetary aggregates can generate a lot of information about the financial stability and overall health of a country. For example, monetary aggregates that grow at a pace that is too rapid may cause fear of overinflation – if there is a greater amount of money in circulation to be used on the same amount of goods and services, prices are likely to rise in response – which is a common example of the law of supply and demand. If this occurs, central banking groups are likely to be forced to raise interest rates or stop the money supply growth in some way.

For decades, monetary aggregates were essential for understanding a nation's economy and were key in establishing central banking policies in general. The past few decades have revealed that there is a lower connection between fluctuations in the money supply and significant metrics like inflation, as well as gross domestic product (GDP) and unemployment. As of 2016, the central bank's monetary policy is better understood by looking at the amount of the money the Federal Reserve is releasing into the economy. M2 is still considered to be useful as an indicator of potential inflation when it is compared to GDP growth.