Different countries define and measure money supply in slightly different ways depending on their financial systems and policy needs. Although the basic idea remains the same—tracking liquidity in the economy—the components included in monetary aggregates (like M0, M1, M2, M3, etc.) vary across regions. These differences reflect how each country structures its banking system, regulates financial institutions, and conducts monetary policy.
Hong Kong (Currency System and Peg)
In Hong Kong, the currency system is unique because banknotes are issued not only by the government but also by three private banks under the supervision of the Hong Kong Monetary Authority. The system operates under a currency board arrangement, meaning that every Hong Kong dollar issued must be backed by an equivalent amount of US dollars. These reserves are held in the Exchange Fund, which is one of the world’s largest.
Hong Kong maintains a fixed exchange rate (peg) with the US dollar. Over time, this peg has evolved—from linking with the British pound to adopting a US dollar peg. Since 1983, the exchange rate has been stabilized around HK$7.80 per US$1, with a narrow trading band introduced in 2005. This system ensures currency stability and confidence in the financial system.
Japan (Monetary Aggregates)
In Japan, the Bank of Japan defines money supply using several aggregates. M1 includes cash and deposits used for transactions. M2 + CDs adds quasi-money and certificates of deposit, while M3 + CDs further includes deposits from institutions like post offices and savings accounts. The broadest measure, called liquidity, also includes financial instruments such as money market funds, bonds, and repurchase agreements. These definitions reflect Japan’s complex financial system and the importance of institutional savings.
Eurozone (European Monetary System)
In the Eurozone, the European Central Bank defines monetary aggregates in a structured hierarchy. M1 includes currency in circulation and overnight deposits. M2 expands this by adding short-term deposits, while M3 includes broader financial instruments such as repurchase agreements, money market fund shares, and short-term debt securities. These measures help the ECB monitor liquidity and inflation across multiple countries using a single currency, the euro.
United Kingdom (Narrow and Broad Money)
In the United Kingdom, money supply is mainly measured using two indicators. M0, known as narrow money, includes physical currency and reserves held by banks at the Bank of England. M4, known as broad money, includes cash in circulation plus various types of bank deposits held by individuals and businesses. Interestingly, only a small portion of total money supply exists as physical cash, with the majority held in digital or deposit form. M0 represents the most liquid money, while M4 represents less liquid forms.
United States (Multiple Monetary Measures)
In the United States, the Federal Reserve historically measured several monetary aggregates, though today it primarily focuses on M1 and M2.
- M0 includes all physical currency (coins and notes).
- Monetary Base (MB) includes currency plus bank reserves held at the Federal Reserve.
- M1 consists of currency and highly liquid deposits like checking accounts and savings accounts (after 2020 changes).
- M2 expands M1 by including savings deposits, small time deposits, and retail money market funds.
Previously, broader measures like M3 included large deposits and institutional funds but were discontinued in 2006 due to limited usefulness in policymaking. Other measures like MZM and liquidity aggregates were also used to better understand inflation and economic activity. These classifications highlight the complexity of the US financial system and evolving monetary policy tools.
Australia and New Zealand (Oceania Systems)
In Australia, the Reserve Bank of Australia defines M1 as currency plus current deposits, while M3 includes all bank deposits. Broad money further includes borrowings from non-bank financial institutions, and the money base includes currency and bank reserves.
Similarly, in New Zealand, the Reserve Bank of New Zealand defines M1, M2, and M3 with increasing levels of inclusiveness. M3 represents the broadest measure, covering all New Zealand dollar funding in the financial system, excluding inter-institutional and government deposits.
India (Monetary Aggregates by RBI)
In India, the Reserve Bank of India defines money supply using four main aggregates. M0 (Reserve Money) includes currency in circulation and deposits of banks with the RBI. M1 consists of currency held by the public and demand deposits. M2 expands this by adding savings deposits in post offices. M3, the most commonly used measure, includes M1 plus time deposits in banks and represents the broad money supply. M4 further includes all post office deposits (excluding certain savings instruments).
Among these, M3 is the most important indicator for policy analysis, as it reflects the total liquidity available in the economy, including both cash and bank deposits.
Overall Insight
Across all countries, the definition of money supply follows a layered approach—from highly liquid forms like cash (M0 or M1) to broader measures that include deposits and financial instruments (M2, M3, M4). However, the exact composition varies depending on institutional structures, financial development, and policy priorities. Understanding these differences is essential for comparing economies and analyzing global monetary trends.