The money supply is one of the most important variables of an economy. Although there is no uniform definition, it is always classified according to availability and the next higher category includes all lower ones. The ECB defines the first category of monetary aggregates, M0, as circulating currency, i.e. coins and notes, M1 as M0 plus funds on current accounts (payable on demand), M2 as M1 plus fixed-term deposits up to 2 years and savings deposits redeemable at notice at a maximum of 3 months and finally M3 as M2 plus shares in money market funds or securities and repurchase agreements and debt securities with a maturity of up to 2 years. Of these different monetary aggregates, M3 is the most important as it is the most stable. If, for example, only the savings interest rate changes, M1 and M2 are redeployed, but M3 remains constant.
In general, a positive relationship is assumed between the growth of money supply M3 and that of inflation, economic growth and income. This means that an insufficient money supply M3 has negative influences on the other three economic variables. An increase in M3 should therefore have a positive impact on the currency, as income and inflation will also increase as a result.
The chart of the entire available history of the "European Central Bank (ECB) M3 Money Supply y/y" macroeconomic indicator. The dashed line shows the forecast values of the economic indicator for the specified dates.
A significant deviation of a real value from a forecast one may cause a short-term strengthening or weakening of a national currency in the Forex market. The threshold values of the indicators signaling the approach of the critical state of the national (local) economy occupy a special place.
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