Changes in Definitions of Monetary Aggregates

In January 2002, Eesti Pank (Bank of Estonia) changed the definitions of monetary aggregates. The aggregates calculated according to the new definitions will be published at the Eesti Pank web site on 18 February 2002. The earlier time-series will be recalculated according to the new definitions. The main aim of the changes is to adjust and standardise the content of monetary aggregates M1 and M2. (There will be no changes in the definition of monetary aggregate M0).

Before the changes monetary aggregates M1 and M2, calculated and published in the Bank of Estonia statistical publications, comprised the data on deposits of both the government sector and non-residents. Such an approach was based on the interpretation of monetary aggregates, which comprises the majority of the deposits attracted by the financial sector.

At the same time, monetary policy analysis has been adopting definitions of money supply excluding the deposits of non-residents and the central government. The elimination of the latter from the domestic money can be explained by the necessity to analyse, first and foremost, the behaviour of the local real economy.

Thus, the monetary aggregates calculated on the new principles comprise neither the deposits of non-residents nor the central government.

For the new monetary aggregates the boundaries between the money creating sector and the money holding sector have been specified:

a. The sector of financial institutions involved in money creation includes the central bank, credit institutions and other financial institutions active in money creation. Based on this definition, the monetary aggregates are made up of the respective liabilities of credit institutions, loan and savings co-operatives and the central bank.
b. The money holding sector comprises all domestic economic agents which are not included in the money creating sector, excluding the central government and central government funds. According to this definition, from the deposits of the government sector the deposits of local governments are included in monetary aggregates.


Liquidity of the instruments included in monetary aggregates was also considered when new definitions were adopted. The most significant change is that foreign currency demand deposits are included in the narrow monetary aggregate M1. Earlier all foreign currency deposits, including demand deposits, were included in the broad monetary aggregate M2.

The reason for the decision to include foreign currency demand deposits in M1 is that monetary aggregates M1 and M2 proceed from different liquidity level of the instruments which money comprises, ie M1 is more liquid than M2 because the latter comprises also time deposits. The liquidity of foreign currency demand deposits is not related to the maturity of a deposit, and it is easy to exchange foreign currency for local a currency.

As a result of the changes described here, monetary policy analysis becomes more transparent. Also, the aggregates calculated on the new principles are better comparable with the aggregates of other countries. Eesti Pank begins to publish the aggregates calculated on the new principles on 18 February 2002. According to the new definitions the current time-series will be recalculated as well. The definition of monetary aggregate M0 will not change.

Users of statistics should pay attention to the fact that the definitions of monetary aggregates in the banking survey table are still slightly different from the monetary aggregates discussed here (for those differences see the comparison table attached).

New definitions of monetary aggregates M1 and M2


- cash in circulation in the economy (notes and coins issued minus vault cash of credit institutions and loan and savings co-operatives)
- Estonian kroon and foreign currency demand deposits with credit institutions, loan and saving co-operatives and Eesti Pank[1] by residents (excluding central government, extra budgetary funds, social security fund and MFIs).



- M1
- time, savings and other deposits (excluding repurchase agreements) in Estonian kroons and foreign currency with credit institutions, loan and saving co-operatives and Eesti Pank by residents (excluding central government, extra budgetary funds, social security fund and MFIs).


Comparison of the new definition with the previous definitions of Eesti Pank (Bank of Estonia) and with the definitions of the IMF

  Eesti Pank "new" Eesti Pank "old" IMF
Instruments and institutions      
  Cash in circulation in the economy M1 M1 M1
  Demand deposits      
    With Eesti Pank[2] M1   M1
    With credit institutions M1 M1 M1
    With loan and savings co-operatives M1 M1 M1
  Time, savings and other deposits      
    With Eesti Pank[3] M2   M2
    With credit institutions M2 M2 M2
    With loan and savings co-operatives M2 M2 M2
  CDs of Eesti Pank     M2
  Repurchase agreements   M2 M2
  Debt securities issued      
  Money market funds      
  Less than 2 years (less than 3 months)[4] M2 M2 M2
  Over 2 years (over 3 months)[4] M2 M2 M2
  EEK M1, M2 M1, M2 M1, M2
  Foreign currency M1, M2 M2 M2
Residency and sectors      
      Central government   M1, M2  
      National social insurance funds   M1, M2  
      Local governments M1, M2 M1, M2 M1, M2
    Credit institutions      
    Other MFIs   M1, M2  
    Other residents M1, M2 M1, M2 M1, M2
  Non-residents   M1, M2[5]  

[1] Do not comprise deposits with Eesti Pank by the Deposit Guarantee Fund.
[2] "New" definition includes only the private sector deposits (ie deposits of the Estonian Central Depository for Securities Ltd). The IMF definition includes also deposits of financial institutions, ie those of the Deposit Guarantee Fund.
[3] There have been no residents' deposits of this type with Eesti Pank.
[4] The limit for time deposits is 2 years. In case of timeless deposits a three-month prior notice before liquidation of a deposit is a limit.
[5] The sectoral cut of non-residents is applied only in case of EEK deposits.