What are monetary aggregates?
Money is crucial for a modern economy to function. Every day, people use money in one form or another to buy and sell goods and services, to pay and get paid for work, and to enter into and fulfil contracts.
Despite its importance and widespread use, there is no single definition of what money actually is. We tend to define it by its various functions: as a store of value, a unit of account and a medium of exchange. Money can be viewed as a special financial asset that everyone in the economy trusts. For more information about money, how it is created, the various forms it takes and its functions, see the explainer What is Money?
In the euro area, three monetary aggregates are used to measure and analyse the amount of money in the economy: M1, M2 and M3. These aggregates are primarily derived from the consolidated balance sheet of the monetary financial institution (MFI) sector, which can also be regarded as the money-issuing sector.
The monetary aggregates include short-term MFI liabilities to the money-holding sector (i.e. euro area residents other than MFIs and the central government), as well as deposits held with post offices and the central government, such as national savings accounts and Treasury accounts.
The types of liabilities included in the monetary aggregates are defined on the basis of liquidity – that is, how quickly and easily they can be converted into cash or used for payments.
- M1 (narrow money) is the most liquid measure of money, comprising currency (banknotes and coins) in circulation and overnight deposits.
- M2 (intermediate money) includes M1 plus deposits with an agreed maturity of up to two years and deposits redeemable at notice of up to three months.
- M3 (broad money) includes M2 plus repurchase agreements, money market fund shares/units, and debt securities with a maturity of up to two years issued by MFIs.
| Liabilities | M1 | M2 | M3 |
|---|---|---|---|
| Currency in circulation | X | X | X |
| Overnight deposits | X | X | X |
| Deposits with an agreed maturity of up to two years | X | X | |
| Deposits redeemable at notice of up to three months | X | X | |
| Repurchase agreements | X | ||
| Money market fund shares/units | X | ||
| Debt securities issued by MFIs with a maturity of up to two years | X |
What else can I find out from MFI balance sheets?
In addition to monetary aggregates, the consolidated balance sheet of the MFI sector also provides information on the counterparts of M3. These are all the balance sheet items that aren’t included in the calculation of M3. By analysing the development of these counterparts, policymakers can gain an insight into the factors driving the expansion or contraction of the money supply.
In the ECB’s monthly press releases on monetary developments, the counterparts are broken down into:
- claims on the private sector;
- claims on general government;
- longer-term liabilities;
- net external assets;
- remaining counterparts.
For more detailed information on monetary aggregates, the counterparts of M3 and the latest developments, see the web page on monetary aggregates on the ECB’s website.
Related explainers
What is a monetary financial institution?
What is a financial instrument?