M3

We must remember that the M2 includes the M1 (formed by the liquid availability in cash of coins and banknotes in the hands of the public and the reserves of the banks) and to this adds the short-term deposits, savings books, demand accounts and the daily repurchase agreements that people have in the financial system.

In turn, we can say that M3 is less liquid than M1, although it is true that it is a tool widely used by the ECB (European Central Bank) to carry out its economic and monetary policy. The extension of the M3 is the M4.

M3 utility

It is an expanded version of the M1 and M2 that more accurately accounts for the amount of existing money. The M3 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 in the control of the amount of money in circulation to sustain inflation and carry out a 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, M3 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, today, 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 productive sectors of different economies or economic zones.

At a global level, M3 has grown in recent years due to the economic injections of the Fed that have spread worldwide due to the degree of internationalization of its companies and its capital markets.