Monitoring the money stock is important for economic policy makers and financiers to predict changes in the economy. Monetary aggregates, such as M1 and M2, measure the money stock, with M2 being the broadest. Changes in the money supply can affect inflation and price levels, as seen in Germany after World War II.
The money stock is the total amount of money available in the economy of a particular country or region at a particular time. Monitoring the level of the money stock is important for economic policy makers and financiers because it can indicate impending changes in the economy. The stock of money isn’t just government-issued paper and coins. It may also include money substitutes such as bills of exchange, travelers checks and precious metals.
There are several accepted ways of measuring the money stock in the modern financial sector. These are known as monetary aggregates. Each has a different set of parameters that define what should and shouldn’t be counted as part of the money stock. M0, pronounced M zero, is the strictest definition. Includes only the physical money and mint available in the economy. With much of the world’s banking system digitized, M0 is an impractical definition that is rarely used except in theoretical cases.
The most commonly used monetary aggregates are M1 and M2. M1 includes cash and mint and adds all money that is stored in such a way that it is easily accessible, for example, in current accounts or travellers’ cheques. A slightly broader definition, M2 includes everything in M1 and adds money stored in short-term savings accounts, certificates of deposit, and money market shares.
Data on the changes in the monetary aggregates M1 and M2 are published every week by the main monetary institutions of various national economies. The United States Federal Reserve published its first monetary aggregate statistics in 1943. Many countries had been publishing statistics for decades before the first international standards for calculating and publishing monetary aggregates were published in 2000 by the International Monetary Fund (IMF). The IMF is an organization made up of 187 countries that work together to build cooperation and stability among world economies.
Financial industry professionals monitor the stock of money as a way to predict changes in the economy. Changes in a country’s money supply can affect inflation and price levels. For example, many economists agree that a rapid increase in the money supply is often accompanied by rapid inflation. A well-known example of this occurred in Germany after World War II. Germany’s central bank has been issuing huge amounts of money, in part to help finance the war reparations required of the country. Prices skyrocketed and the economy became unstable.
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