Broad Money (M2)

Broad money (M2) is a measure of the money supply that counts the cash held by the public plus the money people and businesses keep in bank accounts, including savings and time deposits. It is wider than narrow money (M1), which counts only cash and balances that can be spent at once, and narrower than measures such as M3 or the UK's M4. Central banks publish M2 regularly as a gauge of how much spending power exists in an economy.

There is no single worldwide definition. Each central bank decides which deposits and instruments to include, guided by the IMF's monetary statistics standards, so "M2" in the United States, the euro area and Pakistan means slightly different things. What they share is the idea of money that is either spendable now or can be turned into spendable money quickly and at little cost.

Picture the money a household could use in the next few weeks. There is cash in the wallet, money in the current account for paying bills, and a savings pot at the bank that could be moved across with a phone call. Narrow money counts the first two. Broad money counts all three.

Add that up for every household and firm in the country and you get M2. If the total grows much faster than the amount of goods and services being produced, there is more money chasing the same things, and prices tend to rise.

In most countries M2 is built in layers:

• Currency. Banknotes and coins held by the public, reported as currency in circulation.
• Demand deposits. Balances in current or checking accounts that can be used for payments at once, a form of commercial bank money.
• Savings and time deposits. Balances in a savings account and term deposits such as certificates of deposit (CDs) and fixed deposits.

Examples of national definitions: the US Federal Reserve's M2 is M1 plus small-denomination time deposits and retail money market fund balances (savings deposits were moved into M1 in 2020). The European Central Bank's M2 is M1 plus deposits with an agreed maturity of up to two years and deposits redeemable at notice of up to three months. The Bank of England uses M4 as its main broad money measure.

The State Bank of Pakistan (SBP) publishes M2 weekly from banks' returns. On the components side, its tables show:

• $\text{CiC}$ is currency in circulation: notes and coins outside the SBP and outside banks' tills.
• $\text{OD}$ is other deposits with the SBP, held by entities other than banks and the government.
• $\text{D}$ is total deposits of the private sector and public sector enterprises with scheduled banks, including residents' foreign currency deposits.

Worked example with round numbers: if currency in circulation is 10 trillion rupees, other deposits with the SBP are 0.1 trillion and bank deposits are 28 trillion, then M2 is $10 + 0.1 + 28 = 38.1$ trillion rupees, of which cash is about a quarter. The SBP also reports the same total from the sources side, as the net foreign assets plus the net domestic assets of the banking system; net domestic assets include bank credit to the government, to the private sector and for commodity operations financing.

The SBP's annual report shows M2 at about Rs 16.0 trillion at end-June 2018. SBP weekly data reported in the press put it at about Rs 37 trillion by May 2025. Cash makes up an unusually large share of Pakistani M2, reflecting the size of the cash economy.

M2 is linked to Reserve Money (M0), the base money issued by the central bank, through the money multiplier:

If reserve money is 12 trillion and M2 is 36 trillion, the multiplier is 3: each rupee of base money supports three rupees of broad money, because banks create deposits when they lend.

From the 1970s to the 1990s many central banks set targets for M2 growth, following the idea, captured in the equation of exchange and the velocity of money, that money growth drives inflation. Most later switched to inflation targeting with interest rates as the main tool, because the link between M2 and prices proved unstable. M2 is still watched as an indicator: the sharp rise in US M2 during the 2020 pandemic, driven by quantitative easing (QE) and government transfers, came before the inflation of 2021-22. In Pakistan, the SBP monitors M2 growth and its sources, especially government borrowing from banks, as part of monetary policy.

• Federal Reserve: Money Stock Measures (H.6)
• State Bank of Pakistan