Understanding Money: Definitions and Types (Narrow vs. Broad)

The definitions of money vary by country but generally include at least a measure for narrow money and one for broad money. Money is a medium of exchange and, more generally, any medium that can be used for the exchange of goods and servicesProducts and ServicesA product is a tangible item that is put on the market for acquisition, attention, or consumption while a service is an intangible item, which arises from.

Narrow Money vs. Broad Money

Money includes bills and coins used by consumers in everyday transactions and bank deposits if they can be used for transactions. The group is generally referred to as narrow money, as opposed to broad money.

Broad money includes all the items included in narrow moneyNarrow MoneyNarrow money is a way of measuring and categorizing the money supply within an economy. It includes specific kinds of money that are highly liquid. Due to, but also any other liquid assets that can be used to buy goods and services.

The total amount of money circulating in an economy is called money supply, and its size is generally tracked and reported publicly by each country’s central bank or government.

Practical Definitions of Money

The distinction between narrow money and broad money is mainly theoretical. The actual definitions of money used by governments and central banks vary from country to country; although basically, every central bank in the world uses some form of measure for narrow money, broad money, and other intermediate items.

The measures are usually identified by an M followed by one or more digits, and sometimes a letter.

Definitions of Money in the United States

The Federal ReserveFederal Reserve (The Fed)The Federal Reserve is the central bank of the United States and is the financial authority behind the world’s largest free market economy. in the United States provides two main measures of money – M1 and M2, where M1 is the narrowest and M2 the broadest.

1. M1 consists of currency in circulation, travelers’ checks of nonbank issuers, demand deposits, and other checkable deposits, e.g., negotiable order of withdrawal accounts at depository institutions.

2. M2 includes all the items included in M1, plus savings deposits and money market deposit accounts, time deposit accounts below $100,000, and balances in retail money market mutual funds.

Definitions of Money in Europe

The European Central BankEuropean Central Bank (ECB)The European Central Bank (ECB) is one of the seven institutions of the EU and the central bank for the entire Eurozone. provides three measures of money – M1, M2, and M3, where M1 is the narrowest and M3 the broadest.

1. M1 consists of currency in circulation plus all overnight deposits.

2. M2 includes all the items in M1, plus deposits redeemable at notice of up to three months and deposits with an agreed maturity of up to two years.

3. M3 includes all the items in M2, plus repurchase agreements, money market fund shares, money market paper, and debt securities issued with a maturity of fewer than two years.

Definitions of Money in the United Kingdom

The Bank of EnglandBank of EnglandThe Bank of England (BoE) is the central bank of the United Kingdom and a model on which most central banks around the world are built. Since uses four measures of money – M0, M2, M4, and M3H, where M0 is the narrowest, and M4 is the broadest.

1. M0 consists of currency in circulation plus bankers’ deposits at the Bank of England.

2. M2 includes all the items in M0, plus retail bank deposits.

3. M4 includes all the items in M2, certificates of deposits, and wholesale bank and building society deposits.

4. M3H is an additional measure create to allow comparisons with money definitions used by the ECB. It includes all the items in M4, plus foreign currency deposits in banks and building societies.

Definitions of Money in Australia

The Reserve Bank of Australia uses three measures of money – M1, M3, and Broad Money, where M1 is the narrowest and Broad Money the broadest.

1. M1 consists of coins and bills in circulation plus bank current deposits from private non-bank entities.

2. M3 consists of all the items in M1 plus other deposits from building societies and credit unions with banks.

3. Broad Money includes the items in M3, plus borrowings from the private sector by non-bank depository corporations excluding holdings of currency and deposits of non-bank depository corporations.

Definitions of Money in Japan

The Bank of Japan uses three measures of money – M1, M2, and M3, where M1 is the narrowest and M3 the broadest.

1. M1 includes coins and bills in circulation plus deposits.

2. M2 includes the items in M1, plus certificates of deposit.

3. M3 includes the items in M2, plus savings and deposits at financial institutions and post offices.

Summary

• The definitions of money vary by country but generally always include at least a measure for narrow money and one for broad money.
• The measures are generally indicated by an M followed by one or more digits/letters.
• The different measures used by central banks significantly affect the comparability of money across markets.
• Only a few central banks, such as the Bank of England, issue additional measures of money to help comparisons with other economies.

Additional Resources

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