The Components of the Monetary Aggregates

The Federal Reserve publishes data on three monetary aggregates. The first, M1, is made up of types of money commonly used for payment, basically currency and checking deposits. The second, M2, includes M1 plus balances that generally are similar to transaction accounts and that, for the most part, can be converted fairly readily to M1 with little or no loss of principal. The M2 measure is thought to be held primarily by households. The third aggregate, M3, includes M2 plus certain accounts that are held by entities other than individuals and are issued by banks and thrift institutions to augment M2 type balances in meeting credit demands; it also includes balances in money market mutual funds held by institutional investors.

 The aggregates have had different roles in monetary policy as their reliability as guides has changed. The following details their principal components:

 M1 is composed of currency, traveler’s checks, Demand accounts, NOW and similar interest earning checking accounts.

 M2 is composed of M1 plus savings deposits and money market deposit accounts

 M3 is composed of M2 plus large time deposits, Institutional money market fund balances, repurchase agreements and eurodollars.

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