The importance of monitoring the development of broad money has been recognised in successive versions of the MTFS and was restated again this year. Broad money growth will continue to be taken into account in the assessment of monetary conditions, although no formal target has been set for this financial year. The Governor in the Loughborough Lecture addressed the difficulties of targeting broad money against a background of deregulation and innovation within the financial system. Among the developments discussed was the impact of increased competition between banks and building societies on measures of broad money. The Building Societies Act, which came into effect earlier this year, provides a further spur to such competition. It also opens up the possibility that some societies may opt to become banks.
This article looks at measures of broad money which include both building society and bank deposits, and compares their behaviour with that of £M3. One such measure, PSL2, has been in the public domain for some time, but it also includes money-market instruments, certificates of tax deposit (CTDs) and some national savings accounts. This article also considers an alternative, but similar, aggregate, whose coverage is limited to bank and building society sterling deposit liabilities to the non-bank, non-building-society private sector and that sector's holdings of notes and coin. This aggregate is conceptually equivalent to £M3 in that, notwithstanding the inclusion of notes and coin which are liabilities of the public sector, it is institutionally based. Indicative of this relationship, it is referred to in the remainder of this article as M4. Broad money, however, comprises a spectrum of financial assets, often closely related and with a high degree of substitution between them. Particular definitions such as £M3 and M4 can be regarded as representative points on that spectrum. PSL2 is yet another point on the same spectrum and in this article it is given the title of M5.
Published on
01 June 1987
Measures of broad money