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Monetary analysis

Longer-term perspective

The monetary analysis focuses on a longer-term horizon than the economic analysis. It exploits the long-run link between money and prices. The monetary analysis mainly serves as a means of cross-checking, from a medium to long-term perspective, the short to medium-term indications for monetary policy coming from the economic analysis.

Monetary and credit developments

Monetary analysis consists of a detailed analysis of monetary and credit developments with a view to assessing their implications for future inflation and economic growth. Monetary analysis is conducted at the ECB using a broad set of tools and instruments that are continuously refined and expanded.

The tools and instruments include a comprehensive analysis of the developments of the monetary aggregates, particularly those of the broad aggregate M3, based on information stemming from their components and counterparts. The monetary analysis at the ECB also benefits from the availability of a growing number of econometric models of monetary and credit aggregates developed by both academics and economists at public institutions. Institutional and model-based analyses are important complementary blocks that enable the extraction of medium and long-term signals from the monetary data.

Monetary aggregates

The starting-point for the definition of euro area monetary aggregates is the consolidated balance sheet of the MFI sector. In general, the appropriate definition of a monetary aggregate largely depends on the purpose for which the aggregate is intended. Given that many different financial assets are substitutable and that the nature and characteristics 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 which definition of money. For these reasons, central banks usually define and monitor several monetary aggregates.

The ECB’s definitions of euro area monetary aggregates are based on a harmonised definition of the money-issuing sector and the money-holding sector as well as of harmonised categories of MFI liabilities. The money-issuing sector comprises MFIs resident in the euro area. The money-holding sector includes all non-MFIs resident in the euro area excluding the central government sector. Even though the central government sector is not considered to be part of the money-issuing sector, central government liabilities of a monetary nature (e.g. deposits held by households with the post office) are included as a special item in the definition of monetary aggregates because they are highly liquid. Deposits held by the central government with the MFI sector are excluded because the central government is not included in the money-holding sector, given that its money holdings are not closely related to spending plans.

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 monetary aggregate (M3). These aggregates differ with regard to the degree of liquidity (as assessed on the basis of the criteria of transferability, convertibility, price certainty and marketability) of the assets they include. The table below sets out the definitions of euro area monetary aggregates.

M1 comprises currency, i.e. banknotes and coins, and overnight deposits. These deposits can immediately be converted into currency or used for cashless payments.

M2 comprises M1 and, in addition, deposits with an agreed maturity of up to and including two years or redeemable at a period of notice of up to and including three months. These deposits can be converted into components of narrow money, but some restrictions may apply, such as the need for advance notification, penalties and fees.

M3 comprises M2 and certain marketable instruments issued by the resident MFI sector. These marketable instruments are repurchase agreements, money market fund shares/units and debt securities with a maturity of up to and including two years (including money market paper). A high degree of liquidity and price certainty make these instruments close substitutes for deposits. As a result of their inclusion, broad money is less affected by substitution between various liquid asset categories and is more stable than narrower definitions of money.

Holdings by euro area residents of liquid assets denominated in foreign currencies 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.

Definitions of euro area monetary aggregates
Liabilities1 M1 M2 M3
Currency in circulation X X X
Overnight deposits X X X
Deposits with an agreed maturity of up to 2 years   X X
Deposits redeemable at notice of up to 3 months X X
Repurchase agreements X
Money market fund shares/units X
Debt securities issued with a maturity of up to 2 years X
1Monetary liabilities of MFIs and central government (post office, treasury) vis-à-vis non-MFI euro area residents excluding central government. In August 2012, the ECB has amended its statistical measurement of broad money to adjust for repurchase agreement (repo) transactions with central counterparties (see also Box 3 of the September 2012 Monthly Bulletin: “The adjustment of monetary statistics for repurchase agreement transactions with central counterparties”).