What Is M3? Definition, Liquidity, Disuse, and M Classifications (2024)

What Is M3?

M3 is a measure of the money supply that includes M2 as well as large time deposits, institutional money market funds, short-term repurchase agreements (repo), and larger liquid assets.

The M3 measurement includes assets that are less liquid than other components of the money supply and are referred to as "near money," which are more closely related to the finances of larger financial institutions and corporations than to those of small businesses and individuals.

Understanding M3

The money supply, sometimes referred to as the money stock, has many classifications of liquidity. The total money supply includes all of the currency in circulation as well as liquid financial products, such as certificates of deposit (CDs).

The M3 classification is the broadest measure of an economy's money supply. It emphasizes money as a store of value more so than as a medium of exchange, hence the inclusion of less-liquid assets in M3. Less liquid assets would include those that are not easily convertible to cash and therefore not ready to use if needed right away.

M3 was traditionally used by economists to estimate the entire money supply within an economy and by central banks to direct monetary policy in order to control inflation, consumption, growth, and liquidity, over medium and long-term periods.

In order to determine M3, each M3 component is given equal weight during calculation. For example, M2 and large time deposits are treated the same and aggregated without any adjustments. While this does create a simplified calculation, it assumes that each component of M3 affects the economy in the same way, which is not the case in the actual economy.

This equal weighting can be considered a shortcoming of the M3 measurement of the money supply, which is why it is no longer used as a true measurement of the money supply any longer.

Disuse of M3

Since 2006, M3 is no longer tracked by the U.S. central bank, the Federal Reserve; however, even before that, primarily in the 1980s, the Fed only focused on M2 to guide policy. In 1993, Fed Chairman Alan Greenspan said that the Fed would no longer use any money aggregates (including M2) to guide FOMC policy.

The Federal Reserve Bank of St. Louis and some other sources still publish M3 figures for economic data purposes.

M3 and the Other M Classifications

M3 can be thought of as a congregation of all the other classifications of money (M0, M1, and M2) plus all of the less liquid components of the money supply.

M0 refers to the currency in circulation, such as coins and cash. M1 includes M0,demand deposits, such as checking accounts, traveler's checks, and currency that is out of circulationbut readily available.

M2 includes all of M1 (and all of M0) plus savings deposits and certificates of deposit, which are less liquid than checking accounts. M3 includes all of M2 (and all of M1 and M0) but adds the least liquid components of the money supply that are not in circulation, such as repurchase agreements that do not mature for days or weeks.

The Bottom Line

M3 is a classification of money that includes all other classifications: M0, M1, and M2, and other components of the money supply. The Fed ceased its publication in 2006, however, it is still printed for historical comparisons by other sources.