What it means
Where M1 covers instantly spendable money and M2 adds household savings-type balances, M3 extends the definition into the wholesale end of the system. Its extra components typically include large time deposits, institutional money market fund balances and short-term repurchase agreements between financial institutions.
These items are less liquid for the holder in a day-to-day sense, but they are enormous in scale and they fund a great deal of lending. Following them gives a view of the money and near-money circulating among institutions, which household-focused measures miss entirely.
The measure's status varies by jurisdiction. The European Central Bank still publishes M3 and has historically used it as one reference for policy, whereas the US Federal Reserve discontinued its M3 series in 2006 on the grounds that it added little information beyond M2 relative to the cost of compiling it.
Where M3 is published, analysts use it mainly to spot credit conditions changing at the wholesale level before those changes reach households. A sharp slowdown in M3 growth can indicate that banks and funds are pulling back from lending to each other, which tends to be followed by tighter credit for businesses.
The main caution is comparability. Because national definitions of the broad aggregates differ more than the narrow ones do, an M3 figure from one central bank is not directly comparable with another, and the series is best read as a trend within a single economy.
It also helps to remember what the aggregates are not. None of them measures wealth, credit quality or the health of the banking system directly, and a rising M3 can reflect either healthy lending growth or a build-up of idle institutional cash, which have very different implications.
In practice
Real-world examples.
Example
A euro area strategist tracks published M3 growth against the central bank's own historical reference rate. A prolonged run well above that pace forms part of her argument that policy is looser than officials are acknowledging.
Example
A corporate treasurer notices institutional money market balances rising sharply within the M3 components. He reads it as companies parking cash rather than investing, and adjusts his own forecast of industrial demand downwards.
Example
A university researcher comparing monetary conditions across regions has to construct a proxy for US M3 from component data, because the official series was discontinued and no direct equivalent is published.
Think of it
“M3 is the broadest money measure-M2 plus large institutional funds.
Formula
Calculation
M3 = M2 + Large time deposits + Institutional money market fund balances + Repurchase agreements and similar short-term instruments
The figures below are illustrative round numbers used to show the method, not published statistics for any real economy.
M2: $21,000 billion
Large time deposits: $1,800 billion
Institutional money market funds: $4,200 billion
Repurchase agreements: $1,000 billion
M3 = $21,000bn + $1,800bn + $4,200bn + $1,000bn = $28,000 billion, or $28 trillion
If M3 stood at $26,000 billion a year earlier, annual growth is ($28,000bn - $26,000bn) / $26,000bn = $2,000bn / $26,000bn = 7.7% approximately. An analyst would compare that with M2 growth to see whether the expansion is coming from households or from wholesale funding markets.Case study
Seen in the real world.
The following case is illustrative and fictional. Northmarch Capital, an invented boutique asset manager, ran a macro strategy that used broad money growth as one of four inputs into its allocation between equities and government bonds. Its analysts noticed in the fictional scenario that M3 growth had slowed from about 8% to under 1% over three quarters while M2 growth remained near 4%.
The team read that divergence as wholesale funding drying up ahead of any visible stress in household deposits. Northmarch moved roughly 20% of a $600,000,000 portfolio out of bank equities and into government bonds, and in the illustrative story that shift avoided about $34,000,000 of drawdown when credit conditions tightened over the following two quarters.
The firm's own review afterwards was more measured than the outcome suggested. It noted that broad money signals had produced two false alarms in the previous decade, and that the position had been sized as one input among four precisely because no single aggregate is reliable enough to bet a portfolio on.
Watch out
Common mistakes.
- Assuming every central bank publishes M3, when the US discontinued its official series in 2006.
- Comparing M3 figures between countries as though the definitions were standardised, which they are not.
- Reading M3 as a measure of household purchasing power, when much of the difference from M2 is institutional money.
Questions
People also ask.
What does M3 include that M2 does not?
Mainly large time deposits, institutional money market fund balances and short-term repurchase agreements.
Why did the Federal Reserve stop publishing M3?
It concluded the series added little useful information beyond M2 to justify the cost of collecting the data.
Is M3 useful for an ordinary business?
Only indirectly, as a background signal about wholesale credit conditions that may affect borrowing costs later.
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