Money aggregates and money supply

Money aggregates and money supply 

Various kinds of money and money means, which are distinguished by different extent of liquidity, that is to say, speed and ease of conversion into cash, constitute the notion of money aggregates and money supply in the economy. Total of money aggregates is the indication of money supply structure of a country.

Following kinds of money aggregates are distinguished:

М0 – cash;

M1 – includes М0 (cash) as well as various checks and demand deposits (in other words, deposits that are cashed by owners by their first demand);

М2 – ncludes M1 plus fixed-term deposits with the amount under $100 000 (as you know, fixed-term deposits do not allow partial withdrawal by owner before the stated time or, under the procedure of early withdrawal, deposit is charged by certain amount of penalty)

М3 – consists of M2 as well as from fixed-term deposits with the amount over $100 000.

Certainly, money supply structure of a country is not a constant figure, it is variable. Distinction of more developed countries is that cash (М0) constitute a minor percentage in total money supply, usually under 10%. It is notable that M0 figure in Russia is within the range 45-65%.

Important economic figure is monetization factor, which represent the ration of M2 to GDP. This figure is also known as financial depth, and it identifies sufficient amount of money means in circulation in state. For a developed country its best possible level is not less than 55%, whereas lower level tells about shortage of money that prevent economic development of the country.

Traditionally, M2 is considered to be the most significant aggregate. Its value is more often published in USD, and less often – as the percentage from previous value. Data is published weekly, every Friday, at 4.30 as per Washington time (00.30 Moscow time). Market influence of this figure is significant, because it is considered that M2 is one of the crucial indicator of inflation growth in the longer term. As a rule, as M2 grows, national currency rate gets weaker. Though in practice the opposite happens: dollar rate grows that is explained by boosting financial market activity and deposit yield.

The below table shows dynamic of changing of М0 and М2 in Russia within the period 2000 - 2013: