Money market
Market for short-term, highly liquid financial instruments.
The money market is a component of the economy that provides short-term funds, dealing in short-term loans generally for a period of a year or less. It is part of the broader system of financial markets, providing liquidity for the global financial system including capital markets.
- field
- Financial markets
- known_for
- Short-term borrowing, lending, and trading of highly liquid assets
- instruments
- Treasury bills, commercial paper, certificates of deposit, repurchase agreements, federal funds
- participants
- Financial institutions, dealers, banks, central banks, governments, corporations
- functions
- Financing trade, financing industry, profitable investments, commercial bank self-sufficiency, central bank policy lubrication
Lore & Background
The money market consists of financial institutions and dealers in money or credit who borrow or lend for short periods, typically up to twelve months. Trades are done over the counter and are wholesale. The heart of the money market revolves around interbank lending, where banks lend and borrow using instruments such as commercial paper and repurchase agreements, often valued with reference to the London Interbank Offered Rate (LIBOR). Finance companies often secure funding by issuing asset-backed commercial paper, backed by assets like auto loans, credit card receivables, or mortgage loans. Some large corporations issue their own commercial paper, while others have banks issue it on their behalf. In the United States, federal, state, and local governments issue paper to meet funding needs; the U.S. Treasury issues Treasury bills to fund the public debt.
Reader's Guide
The money market serves five functions: financing trade, financing industry, enabling profitable investments, enhancing commercial banks' self-sufficiency, and lubricating central bank policies. It finances domestic and international trade through bills of exchange discounted by the bill market. It helps industries secure short-term loans for working capital and indirectly influences long-term capital market interest rates. Commercial banks use the money market to invest excess reserves in near-money assets, earning income while maintaining liquidity. Developed money markets allow commercial banks to meet emergency fund needs by recalling short-run loans rather than borrowing from the central bank at higher rates. For central banks, money markets provide immediate indicators of monetary conditions through short-term interest rates, enable efficient policy implementation via rapid transmission through interbank markets, and facilitate liquidity distribution among financial institutions, reducing the need for direct central bank intervention.
Did You Know?
- Money market trades in short-term financial instruments commonly called 'paper'.
- The heart of the money market revolves around interbank lending, often valued with reference to LIBOR.
- Finance companies often secure funding by issuing asset-backed commercial paper backed by assets like auto loans or mortgage loans.
- The U.S. Treasury issues Treasury bills to fund the U.S. public debt.
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