What is ‘M3’
M3 is a measure of the money supply that includes M2 as well as large time deposits, institutional money market funds, short-term repurchase agreements and other larger liquid assets. The M3 measurement includes assets that are less liquid than other components of the money supply and are referred to as “near, near money,” which are more closely related to the finances of larger financial institutions and corporations than to those of small businesses and individuals.
BREAKING DOWN ‘M3’
The money supply, sometimes referred to as the money stock, has many different classifications of liquidity, and M3 is just one of them. The total money supply includes all of the currency in circulation as well as liquid financial products, such as certificates of deposit (CDs).
The M3 classification is the broadest measure of an economy’s money supply. It emphasizes money as a store-of-value more so than money as a medium of exchange — hence the inclusion of less-liquid assets in M3. It is used by economists to estimate the entire money supply within an economy, and by governments to direct policy and control inflation over medium and long-term periods.
M3 can be thought of as a congregation of all the other classifications of money (M0, M1 and M2) plus all of the less liquid components of the money supply. M0 refers to the currency in circulation, such as coins and cash. M1 includes M0 plus demand deposits such as checking accounts as well as traveler’s checks as well as the currency that is out of circulation, but readily available. M2 includes all of M1 (and all of M0) plus savings deposits and certificates of deposit, which are less liquid than checking accounts. M3 includes all of M2 (and all of M1 and M0) but also adds the least liquid components of the money supply that are not in circulation, such as repurchase agreements that do not mature for days or weeks.
Each M3 component is given equal weight during calculation. For example, this means that M2 and large time deposits are treated the same and aggregated without any adjustments. While this does create a simplified calculation, it assumes that each component of M3 affects the economy the same way. This can be considered a shortcoming of this measurement of the money supply.
M3’s Importance to the Federal Reserve
Since 2006, M3 is no longer tracked by the U.S. central bank, the Federal Reserve (Fed). The Fed did not use M3 in its monetary policy decisions even before 2006. The additional less liquid components of M3 did not seem to convey more economic information than was already captured by the more liquid components of M2.