Narrow Money

Reviewed by Annapoorna | Updated on Sep 30, 2020

What is Narrow Money?

Narrow money refers to a category of money supply that includes all the real money held by the central bank. It includes coins and currency, demand deposits, and other liquid assets. Narrow money in the US is known as M1 (M0 + demand accounts). In the UK, M0 is referred to as narrow money.

Narrow Money Explained

The term 'Narrow Money' is derived from the fact that M1/M0 are the narrowest or most restrictive types of money that form the basis for an economy's medium of exchange.

The narrow supply of money includes only the most liquid financial assets. These funds must be available on-demand. Accordingly, it limits the category to physical notes and coins and funds held in the most available deposit accounts.

The European Union collectively owns the largest stock of narrow money in the world, followed by China and Japan, as per the CIA's Factbook. The USA ranks fourth in terms of the narrow money stock, and Germany ranks fifth.

Although M1/M0 is used to characterise narrow money, M2/M3/M4 counts as broad money and M4 represents the biggest money supply term. Broad money can include numerous deposit-based accounts that would take more than 24 hours to mature and be considered public. These are often referred to as long-term deposits, as their production is constrained by a certain time.

The existence of liquid money supply, be it long-term or short-term, will usually have a direct impact on its economic health. Due to the developments in the economy and finance industry, there is an uncoupling of that direct relation.

Narrow Money in India

All the money held with the government, public, and the Reserve Bank of India (RBI) is known as the total stock of money. The money supply is that part of the total stock of money, which is with the public. It includes households, local authorities, firms, companies etc. Hence, public money does not include the money held by the government.

India's Reserve Bank measures money supply principles in India. These are as follows: - Narrow Money (M1) - Broad Money - Reserve Money (M0)

Narrow Money (M1) At any point in time, the money held with the public has two most liquid components:

  1. Currency Component: This contains all the coins and notes which is in circulation.
  2. Demand Deposit Component: Demand deposit component refers to the general public money with the banks. It can be withdrawn by deposit-holders using cheques and ATMs.

The above two aspects of the public money are called Narrow Money, captioned as M1 by the RBI. Thus, M1 equals to the sum of currency with the public and demand deposits of the public in Banks.

Post office savings deposits, when included with M1, as defined above, it becomes M2.

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