What is M3?

M3 is the money supply measurement that comprises M2 along with larger time deposits, larger liquid assets, short-term repurchase agreements (repo) and institutional Money market funds.

The measurement of M3 consists of less liquid assets in comparison to other money supply components’ and are regarded as the Near Money, which is closely associated to the larger corporations and financial institutions’ finances than the ones of individuals and small businesses.

Explaining M3

The classification of M3 is the widest measure of the money supply of an Economy. It focuses more on the money as a store-of-value rather than an exchange medium; hence, the addition of less-liquid assets in the M3 classifications.

In a way, less-liquid assets will include the ones that cannot be easily converted to cash; therefore, they will not be ready to use in case of an emergency. Traditionally, economists used M3 to assess the entire money supply in an economy.

Central banks, on the other hand, used this measurement to direct monetary policy to regulate liquidity, growth, consumption, and Inflation over medium as well as longer time periods. To comprehend M3, each of its components is provided equal weight while calculating the same.

For instance, large time deposits and M2 get treated in the same way and are aggregated without any alterations. Although it creates a straightforward calculation, it presumes that every M3 component is affecting the economy same, which is not the real scenario.

This equal weight can be regarded as an M3 shortcoming, which is the reason why it is not used any longer as a real money supply measurement.

Other M Classifications

• Basically, M3 can be regarded as the congregation of all the classifications of money, such as M0, M1, and M2 and all of the money supply components that are less liquid.
• M0 is known as the in-circulation currency, like cash and coins.
• M1 comprises M0 and demand deposits, like travellers’ cheques, checking accounts and out of circulation but instantly available currency.
• M2 has all of the components of M1 and M0 along with certificates of deposit and saving deposits that are less liquid in comparison to checking accounts.