M3 is a measure of the money supply that includes M2 as well as large time deposits, institutional money market funds, short-term repurchase agreements, and other larger liquid assets. The M3 measurement includes assets that are less liquid than other components of the money supply, and it is used by economists to estimate the entire supply of money within an economy. However, M3 is no longer published by the Federal Reserve in the United States as of March 2006.
Components of M3
M3 consists of M2 plus other financial assets held principally by households and by nonprofit organizations. These additional assets are less liquid than those in M2, and they can be held in different forms.
Large Time Deposits
Large time deposits are deposits over $100,000. These deposits often pay higher interest rates than smaller time deposits, but they are less liquid because the depositor must give notice before withdrawing funds.
Institutional Money Market Funds
Institutional money market funds are mutual funds that invest in short-term debt instruments. These funds typically require higher minimum investments than retail money market funds and may offer higher returns.
Short-Term Repurchase Agreements
Short-term repurchase agreements, or repos, involve the sale of securities with an agreement to repurchase them at a later date at a higher price. Repos are commonly used by banks and other financial institutions to manage their short-term liquidity needs.
Other Large Liquid Assets
Other large liquid assets include Treasury bills and other short-term government securities, as well as commercial paper issued by corporations. These assets are considered liquid because they can be easily bought and sold in financial markets.
Uses of M3
Economists use M3 as a broad measure of the total money supply within an economy. By including a wider range of financial assets than M1 and M2, M3 provides a more comprehensive view of the availability of money for spending and investment purposes.
