The M2 is a monetary aggregate that includes the M1 (coins and bills in the hands of the public and the reserves of the banks) and to this adds the short-term deposits (up to two years), savings books, demand accounts and the daily repurchase agreements that people have in the financial system.
Generally, these deposits hurt to have a maturity of no more than one year.
This aggregate is accounted for differently by country and has its extension to the monetary aggregates M3, M4. While it is true, it is the most used by the US Federal Reserve. This definition of money does not include investments made in equities and fixed income.
The fundamental difference between the different monetary aggregates is the liquidity of the assets that compose it. By liquidity, not only physical money is understood, but also securities and bank accounts, promissory notes, checks.
M2 utility
The M2 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 over time thanks to the fact that it enhances the increase in employment, the balance in the balance of payments and stable money (Fed target).
- In expansive periods, M2 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.