Broad Money

What is broad money?

Broad money is the most inclusive measure of a country’s money supply. It includes highly liquid forms of money (cash and checkable deposits) plus other assets that can be readily converted into cash to buy goods and services—such as savings accounts, time deposits, money market funds, short-term marketable securities and certain foreign currency holdings. It does not include equity (company shares).

How broad money is measured

Economists label money-supply measures with “M” and a number (M0, M1, M2, M3, etc.) to indicate different degrees of liquidity:

• M0 (monetary base): the most liquid items, e.g., currency in circulation and reserves.
• M1 (narrow money): currency in the hands of the public, traveler’s checks, demand/deposit accounts and checking deposits.
• M2: M1 plus savings deposits, small time deposits, and certain money market accounts.
• M3: M2 plus larger time deposits and other longer-term, less-liquid instruments (not tracked by all central banks).

“Broad money” typically corresponds to the broader aggregates (commonly M2 or M3, depending on the country). Exact definitions and which components are included vary by country, so “broad money” is defined explicitly in official statistics to avoid confusion.

Why it matters

Broad money gives policymakers and analysts a clearer picture of the total amount of purchasing power available in the economy, beyond just cash and checking deposits. Central banks monitor broad money growth because it relates to:

• Inflation: Rapid increases in broad money often precede upward pressure on prices.
• Economic activity: More money generally makes credit easier to obtain and can stimulate spending and investment.
• Monetary policy decisions: Interest-rate changes and other interventions are informed in part by trends in broad money.

Practical implications:
* To stimulate growth, central banks may lower interest rates to encourage lending and expand the money supply.
* To combat inflation, they may raise rates and tighten liquidity, reducing money growth.

Example: U.S. money aggregates

In the United States, commonly cited aggregates are M1 and M2. M1 comprises currency, traveler’s checks and demand deposits; M2 adds savings deposits, small time deposits and retail money market funds. (The Federal Reserve discontinued publishing M3.) These aggregates vary over time and are used alongside other indicators to assess monetary conditions.

Benefits of tracking broad money

• Provides a fuller view of liquidity available to households and businesses.
• Helps forecast inflationary pressures and credit conditions.
• Informs central-bank policy choices on interest rates and liquidity operations.

Frequently asked questions

Is broad money the same as M2?
* Often, yes. In many contexts “broad money” refers to M2 (or to M2 and M3 together where M3 is compiled). The exact meaning depends on the jurisdiction and how that country’s authorities define their aggregates.

What’s the difference between M1, M2 and M3?
* M1: most liquid forms (cash and demand deposits).
* M2: M1 plus less liquid but readily accessible funds (savings, small time deposits, retail money market funds).
* M3: M2 plus larger time deposits and other longer-term deposits or market instruments (not always published).

How is broad money used by central banks?
* Central banks compare broad money trends with inflation, growth, and credit indicators to decide on interest rates and other monetary-policy tools. Changes in broad money can signal when policy tightening or easing may be needed.

Bottom line

Broad money is a comprehensive measure of the economy’s money supply that includes cash and assets that can quickly be converted into cash. Because it captures a wider range of liquid and near-liquid assets, it is a useful gauge for policymakers tracking inflation risk, liquidity conditions and the likely effects of monetary policy.