M3 Money Supply

The M3 is the broadest measure of the money supply, encompassing M2 plus large time deposits, institution-only money-market funds, repurchase agreements, and other highly liquid but less-frequently-used assets. M3 attempts to capture the widest definition of liquidity in the financial system, though it is rarely used in modern monetary-policy frameworks.

Components beyond M2

M3 = M2 + Large time deposits + Institutional money-market funds + Repurchase agreements + Large eurodollar deposits + Other institutional liquid assets

Beyond M2’s components, M3 includes:

Large time deposits: Certificates of deposit (CDs) for amounts above $100,000 or other thresholds. These are typically held by corporations and institutions and are less liquid than small time deposits.

Institutional money-market funds: Shares in money-market funds available only to large institutions, typically with higher minimum investments.

Repurchase agreements (repos): Short-term funding vehicles where institutions lend cash against Treasury or other collateral. (See temporary-open-market-operations.)

Eurodollar deposits: Dollar-denominated deposits held outside the United States, primarily in European banks.

Why the broad definition?

The motivation for M3 is to capture the widest possible measure of liquidity in the financial system. The reasoning is that if large institutions have access to vast amounts of liquid funding—even if that funding is not in the form of deposits—it affects their behavior and the economy. A corporation with a large CD portfolio or access to the repo market can spend freely, stimulating the economy, just as a household with a checking account can.

However, M3’s components become so heterogeneous that a single “M3” number becomes less meaningful. A large CD is not the same as a repo; a eurodollar deposit is not the same as a money-market fund share. Aggregating them into a single number obscures important differences.

M3 in practice

The Federal Reserve stopped publishing M3 in 2006, judging that it was no longer useful. The Fed noted that:

• The relationship between M3 and inflation (or growth) had become unstable and unpredictable.
• M2 captured the economically important variation in liquidity.
• The broadest definition of M3 included so many disparate assets that a single number lacked analytical power.

The European Central Bank, by contrast, continued publishing M3 and has historically monitored it more closely. The ECB includes repos, large deposits, and other institutional assets in its M3 definition.

M3 targeting and monetary policy

In the 1980s and 1990s, some central banks experimented with M3 targeting—setting a growth rate for M3 and using policy to hit it. The ECB adopted M3 targeting in the 1990s and has maintained a reference range for M3 growth (historically around 4.5% per year).

However, even proponents of M3 monitoring acknowledge that it is a secondary tool. Most modern central banks focus on interest rates and inflation, with money supply aggregates playing a supporting role.

See also