M1
Candlefocus EditorM1 is a fairly narrow measure of the money supply, limited to the most liquid forms of money. Its components include cash held by consumers and businesses, as well as demand deposits in banks and other depository institutions, such as money-market accounts, checking accounts, and NOW accounts. What is not included are savings deposits, time deposits, money-market mutual funds, and other more illiquid financial assets like bonds.
The purpose of M1 is to measure the total amount of money available for purchasing goods and services within an economy in a given period of time. It is seen as an important indicator of a country’s economic health. When the volume of M1 increases, there is usually an increase in demand for goods and services, which can fuel economic expansion. Conversely, when M1 contracts, economic demand for goods and services usually decrease, leading to slower economic growth.
In recent years, financial innovations such as money-market accounts, credit cards, and the proliferation of electronic banking services have rendered traditional measures of the money supply like M1 less useful to central banks as a guide to monetary policy. It is not unusual for changes in M1 to show little correlation to other economic variables, such as inflation and employment. As a result, most central banks no longer use M1 as the primary statistic when determining their policies.
In conclusion, M1 is an important measure of the money supply it is an important indicator of a country’s economic health. However, due to the lack of correlation between changes in M1 and other economic variables, it is no longer used for setting monetary policy.