CandleFocus

Broad Money

Candlefocus Editor
Broad money, often referred to by its acronym M3, is a macro-monetary concept used by central banks to measure the circulating supply of money in an economy. It is the most broad, and arguably most useful, measure of the money supply because it includes all the forms of money - cash, and all other assets easily convertible into cash, such as checking deposits and savings deposits.

Broad money is essentially the economy’s liquid assets, meaning that it takes into account any and all assets that can quickly and easily be converted into currency. Because of this, broad money is essentially the total amount of money in circulation in an economy, although it is not always accurately measured.

Broad money is calculated by measuring both the physical currency a country has, such as coins and paper banknotes, as well as more intangible assets, such as checking and savings deposits. Central banks tend to focus on broad money growth because it accurately reflects the circulation of money in the economy. If the rate of broad money growth is too high or too low, it can often be an indication of a future inflationary or deflationary cycle.

Central banks use a variety of measures and formulas to calculate now much money is in circulation, but all uses of the term ‘broad money’ should be accompanied by a definition in order to avoid misinterpretation. The growth rate of broad money often serves as an indicator of economic activity and is a popular tool among central banks for monitoring inflation. By tracking the growth of money over time, central bankers can better prepare for inflationary or deflationary cycles, as well as make more sound financial decisions.

Glossary Index