Money Stock Measures

ECO201

Money Stock Measures

M1, M2, and MZM are the components that make up the money supply and can be viewed as a spectrum from narrowest to broadest with M1 being the narrowest, M2 being more broad than M1, and MZM being the broadest component. M1 represents the supply of currency in circulation in the form of notes, coins, traveler’s checks and demand deposits. M2 includes all the factors of M1 in addition to saving deposits, certificates of deposit, and money market deposits on an individual level. When you compare M1 and M2 the provided insights could show just how quickly the economy is spending and how quickly it is saving.

Money with zero maturity, or MZM, is the broadest component consisting of the supply of assets redeemable in forms such as notes and coins in circulation, traveler’s checks, demand deposits, other checkable deposits, savings deposits, and all money market funds. “MZM helps determine how often financial assets are switching hands within the economy” (Federal Reserve Bank of St. Louis).

When looking at the data from the components listed you can definitely see a major increase in the amount of money that has been added into the economy. In 1985, data indicates that there was 395.7 billion dollars making up the economy and that number increased more than 3 times that amount to 1,709.9 billion in January of 2015. This can probably be attributed to the “Great Recession” that occurred between 2003 and 2008. During this time, unemployment was high and people were not making deposits as often or as frequently as when unemployment rates were lower.

Based on the data provided one trend that stands out is that is seems that more and more people rely on physical currency when the economy takes a turn for the worse. This would make sense as it is more reassuring to have physical money in hand rather than at a financial institution where some decisions are out of your hands. Prior to 2003 the increase had been slow and rather steady. As things took a turn for the worse the financial assets that are primarily held by households started to increase much faster while other components of the economy kind of leveled off on a monthly basis with some indicators that on a weekly basis they would dip down. When you look closely at mid 2018 you can see that there is a noticeable jump in Total Checkable Deposits and M1 Money Stock.

References

Federal Reserve Bank of St. Louis, Velocity of MZM Money Stock [MZMV], retrieved from

FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MZMV, July 18, 2019.

Board of Governors of the Federal Reserve System (US), M2 Money Stock [M2SL], retrieved

from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/M2SL, July 18, 2019.

Board of Governors of the Federal Reserve System (US), Total Checkable Deposits [TCDSL],

retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/TCDSL, July 18, 2019.

Board of Governors of the Federal Reserve System (US), Travelers Checks Outstanding

[TVCKSSL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/TVCKSSL, July 18, 2019.

Board of Governors of the Federal Reserve System (US), Currency Component of M1

[CURRENCY], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CURRENCY, July 18, 2019.