• Monetary aggregate: A formal accounting method for money, including cash or money market funds.
• Money supply: Measured using monetary aggregates in a country.
• Monetary base: Comprises the total supply of money in circulation and the central bank’s reserved portion of commercial bank reserves.
• Federal Reserve: Utilizes money aggregates as a statistical measure to assess the impact of open-market activities on the economy.

Pointers

 Money aggregates: Broad categories for quantifying an economy's money supply.

• M0: The monetary base consisting of physical paper and coin money in circulation and central bank reserves.
• M1: Includes M0 along with traveler’s checks and demand deposits.
• M2: Encompasses M1, money market shares, and savings deposits.
• Working Group on Monetary Aggregate: Established under the Chairmanship of Dr. Reddy to analyze the scientific aspects of financial studies.
• Four monetary aggregates: Proposed by the Working Group based on financial sector liquidity and ranking:
  • M0 (monetary base)
  • M1 (narrow money)
  • M2
  • M3 (broad money).

Reserve Money (M0)

• Reserve Money: Also known as "High Powered Money" or "Base Money".
• Total liability of the RBI.
• Category of cash supply encompassing physical cash (coins and notes), demand deposits, and other liquid assets held by the central bank.
• M0 formula: Includes currency in circulation, bankers’ deposits with the RBI, and 'other' deposits with the RBI.
• Currency in circulation: Comprises notes and coins in circulation.
• Bankers’ deposit with the RBI: Refers to bank's current account deposit with RBI.
• Other deposits: Encompasses balances in the accounts of foreign central banks, government, and international agencies like the IMF.

Narrow Money (M1)

• Narrow money aggregates: Focus on the most liquid assets primarily used for spending, such as money and checkable deposits.
• Components of M1: Consist of currency with the public, demand deposits with banking organizations, and 'other' deposits with the RBI.
• Demand deposits with the Banking System: Comprise current deposits and the demand liabilities portion of savings deposits.
• M2: An extension of narrow money, includes savings deposits from post office savings accounts, in addition to the components of M1.
• Components of M2: Incorporates time liabilities of savings deposits with the Banking System, certificates of deposit issued by banks, and term deposits with a legally binding maturity of up to and including 1 year with the Banking System (excluding CDs).

Broad Money (M3)

• Broad money: Represents the aggregate of various components including currency with the public, current deposits, savings deposits, certificates of deposits, term deposits, borrowings from non-depository financial institutions by the banking system, and other deposits with RBI.
• M3: Focuses on the balance sheet of the banking sector.
• Components of M3: Includes M2, term deposits with a maturity exceeding one year with the Banking System, and call/term borrowings from non-depository financial institutions by the Banking System.

Liquidity and Ranking in Monetary

Impact of Monetary Aggregates

• Monetary aggregates analysis: Offers valuable insights into a country’s financial stability and general health.
• Example: Rapid growth in monetary aggregates may trigger concerns regarding high inflation rates.
• Impact of excess money: Prices are likely to increase if there's an excess of money in circulation relative to the quantity of products.
• Response to high inflation: Central banks may need to raise interest rates or curtail money supply expansion to address high inflationary pressures.

Effects of Monetary Aggregates

• Monetary aggregates data: Utilized for analyzing a country’s economic health and financial stability.
• Central banks: Rely on these data to formulate monetary policy over decades.
• Economists' observations: Highlight a discrepancy between money supply fluctuations and indicators like unemployment, GDP, and inflation.
• Federal Reserve's role: Its monetary policy is influenced by the central bank's policy and decisions.

Conclusion

• Monetary aggregates: Play a crucial role in understanding a country’s economy and shaping central banking policy.
• Observations over decades: Have revealed a weakening connection between money supply changes and key indicators such as inflation, Gross Domestic Product (GDP), and unemployment.