What makes up the money supply in the UK economy?

The money supply in the UK economy consists of several components, often referred to as the "monetary aggregates." These components are classified into different measures or M-series, which represent different forms of money held by individuals, businesses, and financial institutions. The Bank of England monitors and reports on these measures to assess the overall money supply and its impact on the economy.

The main components of the money supply in the UK include:

1. M0: M0, also known as the "narrow money" or the "central bank money," represents the most liquid forms of money. It includes physical currency (banknotes and coins) in circulation issued by the Bank of England and reserves held by commercial banks at the central bank.
2. M1: M1 includes M0 and adds the "sight deposits" held by individuals and businesses at banks, which are readily accessible for immediate transactions through checks, debit cards, and other payment instruments. It represents the broader measure of money used for day-to-day transactions.
3. M2: M2 includes M1 and further adds "time deposits" or savings accounts that have a specific maturity period and require notice or penalties for early withdrawals. These deposits are less liquid than sight deposits but are still part of the money supply.
4. M3: M3 represents the broadest measure of the money supply. It includes M2 and adds various longer-term financial instruments, such as certificates of deposit, sterling holdings of money market funds, and other deposits with a maturity period of up to two years.

It's worth noting that in recent years, the Bank of England has shifted its focus from the traditional M-series measures to a broader framework known as "Divisia measures." Divisia measures account for the varying degrees of liquidity and substitutability among different components of the money supply. These measures provide a more refined analysis of the money supply and its relationship with economic activity and inflation.

The composition and definitions of the money supply can vary across countries and central banks. The components mentioned above are specific to the UK and provide an overview of the main constituents of the money supply in the UK economy.