Monetary Aggregates

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Dictionary Says

Definition of 'Monetary Aggregates'

Broad categories measuring the total value of the money supply within an economy. In the United States, the standardized monetary aggregates and their measured contents are known as:

M0 – Physical cash and coin
M1 – All of M0 plus demand deposits, traveler's checks
M2 – All of M1 plus savings deposits, money market shares

There is also an M3 aggregate that includes larger (greater than $100,000) time deposits and institutional funds. The M3 measure is no longer tracked by the Federal Reserve as of 2006, although analysts still calculate the figure broadly. The Federal Reserve uses monetary aggregates to measure the effects of open-market operations, like changing the discount rate or trading in Treasury securities.

Investopedia Says

Investopedia explains 'Monetary Aggregates'

Monetary aggregates are watched closely by economists and investors, as they give a clear picture of the true size of the "working" money supply. Frequent reporting of the M1 and M2 measures (data is published weekly) allows investors to measure the rate of change in the monetary aggregates and overall monetary velocity.

If the monetary aggregates are growing too quickly, it could trigger inflationary fears (more money chasing after the same amount of goods and services leads to rising prices) and cause central-banking groups to raise interest rates or otherwise halt money-supply growth.

While the monetary aggregates were once key in determining overall central-banking policy, the past few decades have shown a lower correlation between changes in the money supply and key metrics like inflation, GDP and unemployment.

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