Money Market

Intermediate

The money market is the part of the financial system where short-term borrowing and lending takes place, usually for periods of less than a year, using instruments such as treasury bills, commercial paper and repurchase agreements.

The money market helps banks, companies, governments and investors manage their short-term cash needs. Those with spare cash can lend it out for short periods and earn interest, while those who need cash can borrow it quickly.

Common money market instruments include treasury bills issued by governments, commercial paper issued by companies, certificates of deposit issued by banks, repurchase agreements and interbank loans. These instruments are generally considered low-risk because they are short-term and usually issued by strong borrowers.

For example, a company with surplus cash might buy three-month treasury bills, while a bank short of cash at the end of the day might borrow overnight from another bank.

The money market is central to how monetary policy works. Central banks set their policy rates and use open market operations to influence short-term interest rates in the money market, which then affect rates on loans and deposits throughout the economy. Individual investors usually access the money market through money market funds.

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