What is the Money Market?

The money market is the global financial market for short-term borrowing and lending. It provides short term liquid funding for the global financial system.

In the money markets, participants borrow and lend for short periods of time, typically up to 13 months. Money market trades in short term financial instrument commonly called “paper”. This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity.


The core money market consists of banks borrowing and lending to each other, using commercial paper, repurchase agreements and similar instruments. These instruments are often benchmarked to LIBOR
Finance companies, such GMAC, typically fund themselves by issuing large amounts of asset-backed commercial paper which is secured by the pledge of eligible assets into an asset-backed commercial paper conduit. Examples of eligible assets include auto loans, credit card receivables, residential/commercial mortgage loans, mortgage backed securities and similar financial assets
Certain large corporations with strong credit ratings, notably General Electric, issue commercial paper on their own credit. Other large corporations arrange for banks to issue commercial paper on their behalf via commercial paper lines
The governments issues bills for short term funding needs
Trading companies often purchase bankers acceptances to be tendered for payment to overseas suppliers

Retail and Institutional Money Market Funds
Central Banks
Cash management programs
Arbitrage Asset-backed commercial paper conduits, which seek to buy higher yielding paper, while themselves selling cheaper paper

T-Bills – These are the most liquid money market instrument. They are issue by the government. Most common maturities are 90 days, 180 days and 360 days.

Negotiable Certificates of Deposit – Short term debt instrument offered by banks. They offer better returns than T-Bills due the fact that there is a slight degree of credit risk.

Commercial Paper – an unsecured, short-term loan issued by a corporation, typically for financing accounts receivable and inventories. It is usually issued at a discount, reflecting current market interest rates. Maturities on commercial paper are usually no longer than nine months, with maturities of between one and two months being the average.


Both the monetary and fiscal policy influences the money market.

Monetary policy is the process by which the government, central bank, or monetary authority manages the money supply to achieve specific goals—such as constraining inflation or deflation, maintaining an exchange rate, achieving full employment or economic growth. (Usually the goal of monetary policy is to accommodate economic growth in an environment of stable prices.) Monetary policy can involve changing certain interest rates, either directly or indirectly through open market operations, setting reserve requirements, acting as a last-resort lender (i.e. discount window lending), or trading in foreign exchange markets.

Fiscal policy is the economic term that defines the set of principles and decisions of a government in setting the level of public expenditure and how that expenditure is funded. Fiscal policy and monetary policy are the macroeconomic tools that governments have at their disposal to manage the economy. Fiscal policy is the deliberate and thought out change in government spending, government borrowing or taxes to stimulate or slow down the economy. It contrasts with monetary policy, which describes policies concerning the supply of money to the economy.

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