M1 is a monetary aggregate that is defined as the amount of money that circulates in the economy made up of banknotes and coins in the hands of the public, current deposits of citizens and the reserves that banks have in cash deposited in central banks Of each country.
Therefore, M1 is a measure of the quantity of money in circulation and the money supply. This aggregate is accounted for differently by country and has its extension to the monetary aggregates M2, M3 and M4. This definition of money does not include investments made in equities and fixed income.
Usefulness of the M1
The M1 serves to control the money supply, that is, the amount of money in circulation in an economy or economic zone and is very important for a central bank since it allows spending and investment and indicates the level of economic activity. In turn, economic activity has an impact on growth and inflation.
The central bank will be able to influence, through its economic and monetary policy, the control of the amount of money in circulation to sustain inflation and will carry out sustained growth.
- In expansive periods, M1 rises as banks are more willing to lend money and the amount of money in circulation increases.
- In periods of recession, this monetary aggregate decreases as banks have trouble lending money.
In addition, after the crises suffered, banks have to provide a minimum ratio to reserves in order to cover risks that may arise caused by the world situation and that can generate a contagion effect between countries and between the productive sectors of the different economies or economic zones.