Narrow Money

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DATE: Sept. 26, 2017, 3:45 p.m.

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  1. Narrow Money
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  3. What is 'Narrow Money'
  5. Narrow money is a category of money supply that includes all physical money like coins and currency along with demand deposits and other liquid assets held by the central bank. In the United States, narrow money is classified as M1 (M0 + demand accounts), while in the U.K., M0 is referenced as narrow money.
  7. BREAKING DOWN 'Narrow Money'
  8. The name comes from the fact that M1/M0 are the narrowest or most restrictive ideas of money that are the basis for the medium of exchange within the economy. This category of money is considered to be the most readily available for transactions and commerce.
  10. The narrow money supply only contains the most liquid financial assets. These funds must be accessible on demand, which generally limits the category to physical notes and coins and funds held in the most accessible deposit accounts.
  11. Qualifying Accounts
  13. The most accessible accounts, such as savings and checking deposit accounts, qualify as narrow money. The funds in the accounts are seen as accessible on demand, even if mechanisms other than physical currency are used for the transaction. This most commonly includes funds paid via either debit card transactions or a variety of checks.
  14. Narrow Money and Broad Money
  16. While M1/M0 are generally used to describe narrow money, M2/M3/M4 qualify as broad money, with M4 representing the largest concept of the money supply. Broad money may include various deposit-based accounts that would take more than 24 hours to reach maturity and be considered accessible. These are often referred to as longer-term time deposits, as their activity is restricted by a specific time requirement that the deposit must be held by the institution that accepted the deposit.
  17. Narrow Money and the Money Supply
  19. M1/M0 are only a portion of the money supply. The money supply include items within all of the categories from M0 to M4. Therefore, it represents both the most liquid and the less liquid cash and deposit-based assets held within a nation. This includes funds in bonds or other securities, as well as institutional money market accounts.
  21. With M4, the broadest of the money supply definitions, the general outside limit for an investment to be considered part of the money supply are those scheduled to mature in five years or less. This number, however, is not a strict definition. As with all levels of the money supply, different countries may classify their funds differently, including the exclusion of the M0 or M4 as measures and instead seeing the money supply as divided into M1, M2, and M3 only.
  22. Broad Money
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  25. Broad money is the most inclusive method of calculating a given country's money supply. The money supply is the totality of assets that households and businesses can use to make payments or to hold as short-term investments, such as currency, funds in bank accounts and anything of value resembling money. The formula for calculating money supply varies from country to country, but broad money is always the farthest-reaching; narrow money includes fewer elements in the calculation.
  26. BREAKING DOWN 'Broad Money'
  27. Since cash can be exchanged for many different financial instruments, and it can be placed in various restricted accounts, it is not a simple task for economists to define how much money is currently in a given economy. Therefore, the money supply is measured in many different ways. Economists use a capital letter "M" followed by a number to refer to the calculation that they are using in a given context.
  29. Money Supply in the United States
  31. In the United States, the most common measures of the money supply are termed M0, M1, M2 and M3. These measurements vary according to the liquidity of the accounts included. M0 includes only the most liquid instruments, such as cash or assets that could quickly be converted into currency, so it is the narrowest definition of money. M3 includes liquid instruments as well as some less liquid instruments and is therefore considered the broadest measurement of money. In the United States, M3 is what is colloquially referred to as broad money.
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