Euro area monetary aggregates


The primary objective of the Eurosystem, consisting of the European Central Bank (ECB) and the national central banks (NCBs) of the Member States which have adopted the euro, is to maintain price stability. As there is wide agreement that the development of the price level in the medium to long term is a monetary phenomenon, developments in the amount of money held by the public may reveal useful information about future price movements and thereby offer an important compass for the conduct of monetary policy. In addition, analysis of monetary aggregates can contribute to the general assessment of developments in the financial system and the broader economy.

A monetary aggregate can be defined as the sum of currency in circulation plus the outstanding amounts of certain liabilities of financial institutions which have a high degree of "moneyness" or liquidity in a broad sense. The Eurosystem has defined a narrow (M1), an "intermediate" (M2) and a broad aggregate (M3). These aggregates differ with respect to the degree of moneyness of the assets included. According to the analysis conducted at the ECB and by its predecessor, the European Monetary Institute, broad euro area monetary aggregates might be less controllable in the short term but have more favourable properties than narrow ones in terms of their stability and their information content regarding price developments in the medium term. The monetary policy strategy of the Eurosystem requires identification of a monetary aggregate which is a stable and reliable indicator of inflation over the medium term. Therefore, the Governing Council of the ECB has decided to give the broad monetary aggregate M3 a prominent role in the monetary policy strategy by announcing a reference value for its annual growth rate.

The ECB´s definition of euro area monetary aggregates

The starting-point for the definition of euro area monetary aggregates is the consolidated balance sheet of the MFI sector (see Table 1). In general, the appropriate definition of a monetary aggregate largely depends on the purpose for which the selected aggregate is intended. Given that many different financial assets are substitutable, and that the nature and features of financial assets, transactions and means of payment are changing over time, it is not always clear how money should be defined and which financial assets belong to a certain definition of money. For these reasons, central banks usually define and monitor several monetary aggregates. These range from very narrow aggregates such as central bank money or base money, consisting of currency (i.e. banknotes and coins) and central bank deposits, to broader aggregates, which include currency, bank deposits and certain types of securities.

In defining money, both the microeconomic perspective of the individual holder of money and the empirical properties of monetary aggregates resulting from the joint behaviour of holders of money are relevant.

Schematic consolidated balance sheet of the MFI sector for the euro area

Table 1

Assets Liabilities
Securities other than shares 
Shares and other equities 
External assets 
Fixed assets 
Remaining assets
Currency in circulation 
Deposits of central government 
Deposits of other general governments/other euro area residents 
Money market fund shares/units and money market paper 
Debt securities issued 
Capital and reserves 
External liabilities 
Remaining liabilities

The ECB´s definition of euro area monetary aggregates is based on the following:

A harmonised definition of the money-issuing sector. It consists of those entities that issue liabilities with a high degree of moneyness to non-MFIs located in the euro area (excluding central government). This sector comprises MFIs resident in the euro area.

A harmonised definition of the money-holding sector, which comprises all non-MFIs resident in the euro area (except central government). In addition to households, non-financial corporations and financial institutions which are not MFIs are included, as well as state and local governments and social security funds. Central governments are considered to constitute a"moneyneutral" sector, with one exception: central government liabilities with a monetary character (Post Office accounts, national savings accounts and Treasury accounts) are included as a special item in the definition of monetary aggregates.

The harmonised definitions of MFI liabilities categories. These make it possible to distinguish between MFI liabilities according to their degree of moneyness, while also taking into account the features of different financial systems.

Based on conceptual considerations and empirical studies, and in line with international practice, the Eurosystem has defined a narrow (M1), an "intermediate" (M2) and a broad aggregate (M3). These aggregates differ with respect to the degree of moneyness of the assets included. Table 2 shows the definitions of the euro area monetary aggregates using the definition of liabilities issued by the MFI sector (see Table 1) as well as by entities belonging to the central government sector (Post Offices, Treasuries) of the euro area. As noted above, these aggregates include only positions of residents of the euro area which are held with MFIs located in the euro area. Holdings by euro area residents of liquid assets denominated in foreign currency can be close substitutes for euro-denominated assets. Therefore, the monetary aggregates include such assets if they are held with MFIs located in the euro area.

Narrow money (M1) includes currency, i.e. banknotes and coins, as well as balances that can immediately be converted into currency or used for cashless payments, i.e. overnight deposits.

"Intermediate" money (M2) comprises narrow money (M1) and, in addition, deposits with maturities of up to two years and deposits redeemable at notice of up to three months. Depending on their degree of moneyness, such deposits can be converted into components of narrow money, but in some cases there may be restrictions involved, such as the need for advance notification, delays, penalties or fees.

The definition of M2 reflects the particular interest in analysing and monitoring a monetary aggregate that, in addition to currency, consists of deposits which are liquid.

Broad money (M3) comprises M2 and marketable instruments issued by the MFI sector. Certain money market instruments, in particular money market fund (MMF) shares/units and money market paper, and repurchase agreements are included in this aggregate. A high degree of liquidity and price certainty make these instruments close substitutes for deposits. As a result of their inclusion, M3 is less affected by substitution between various liquid asset categories than narrower definitions of money, and is more stable.

Definitions of euro area monetary aggregates

Table 2

Liabilities M1 M2 M3
Currency in circulation X X X
Overnight deposits X X X
Deposits with agreed maturity up to 2 years   X X
Deposits redeemable at notice up to 3 months   X X
Repurchase agreements     X
Money market fund (MMF) shares/units and money market paper     X
Debt securities up to 2 years     X