Charts & Numbers

The modern government’s of today regulate the economy by monetary policy. Monetary policy is the process the Federal Reserve (Fed), or central bank of Kuwait (CBK), control the following:

• Supply of Money
• Availability of Money
• Cost of money (interest rate)

The supply of money is broken down into different types of ‘money’ based on its effects by monetary policy. The measures are placed along a spectrum; from the narrowest to broadest measures.

• Narrow Measures: Directly affected by monetary policy.
• Broad Measures: Less related to monetary policy decisions.  The broad measures are usually indirectly effected by changes in the monetary policy.

The M’s defined.

The different types of measures are classified as M’s. The M’s range in measures  from M0 (narrow) to M4 (broad).

The M0 is often referred to as the monetary base. It is the base from which other forms of money are created. Currency, includes notes and coins, in circulation and in bank vaults. Cash (reserves) owned by banks that is held by the Fed, or central bank.  Traditionally, it is the most liquid measure of the money supply.

The M1 represents the assets that strictly conform to the definition of money. It includes currency in circulation, demand deposits (and other deposits that work in the same way), and finally, K-Net transactions through their links to bank accounts and are also considered as a form of money.

The M2 is the most common economic indicator in forecasting inflation. It is usually represented by savings deposits, time deposits and money market accounts for individuals, plus the M1. In essence it represents as close as substitute to ‘money’ as possible.

The M3 is no longer used by the Fed or the central bank of Kuwait. It is the M1 + M2 and the large deposits of money market funds by institutions. It is also made up of short term repo’s and larger liquid assets.

Many countries use the M4 such as the Bank of England which is composed of cash outside banks. It is composed of the money in circulation with the public and non-banking firms, private sector retail and wholesale banks, and building society deposits.

The M’s are defined differently in every nation. For example, in England, India, and Japan, the M’s differ in terminology but all are in the same order of narrowest to broadest.

The above definitions were those used by the Federal Reserve and as closely related to the Central Bank of Kuwait definition.