MacroeconomicsI_working_version (1)

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Chapter 7
7.3.1. A Narrow Definition of Money
Money in a form of currency including banknote, coins or the metallic money (in the past)
has been considered the most trustworthy means of payment. Today, the use of such
currency is rather limited because of using the bank deposit instead. So, the narrow
definition of money covers currency holding by the public (households, firms, and
government) plus the checkable or sight deposits (demand deposits or checkable accounts
that are payable on demand). Accordingly, currency and sight deposits (as the generally
accepted means of payment and the most liquid asset) are denominated as monetary
aggregate M1.
M1 = currency in circulation + sight deposits (checkable accounts).
7.3.2. Broader Aggregates
Banks often offer more attractive accounts than the sight or checkable deposits. The
deposits included in M1 bear no or very low interest yield and cheques can be written or
transfers can be made against them. The aggregate M2 includes, in addition, the savings
(time) deposits with small time of maturity. Such funds can be very easily transferred into
regular sight deposits – through a series of keystrokes on a telephone handset, an Internet
connection or simply through a phone call. M2 is considered the second and a bit broader
definition of money:
M2 = M1 + time (or savings) deposits at banks with unrestricted access.
The time of maturity, size of the assets and the access differ the aggregate M3 from M2.
The aggregate M3 covers M2 plus the assets such as time deposits with a longer term of
maturity and possibly restricted access, deposits denominated in foreign currency, large
certificates of deposits, and deposits in non-bank institutions. The time of maturity and size
of an asset, which differ M3 from M2, depend on local rules or conventions. In general, we
can say that the aggregate M3 covers less liquid assets (that are costly and difficult to
convert into currency or checkable deposits). On the contrary, such assets bear higher
interest yield.
M3 = M2 + larger, fixed-term deposits + accounts at non-bank institutions.