The money market is a component of the economy that provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less.
As short-term securities became a commodity, the money market became a component of the financial market for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. Trading in money markets is done over the counter and is wholesale.
There are several money market instruments in most Western countries, including treasury bills, commercial paper, banker's acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage- and asset-backed securities.[1] The instruments bear differing maturities, currencies, credit risks, and structures.[2] A market can be described as a money market if it is composed of highly liquid, short-term assets. Money market funds typically invest in government securities, certificates of deposit, commercial paper of companies, and other highly liquid, low-risk securities. The four most relevant types of money are commodity money, fiat money, fiduciary money (cheques, banknotes), and commercial bank money.[3] Commodity money relies on intrinsically valuable commodities that act as a medium of exchange. Fiat money, on the other hand, gets its value from a government order.
Money markets, which provide liquidity for the global financial system including for capital markets, are part of the broader system of financial markets.
The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods, typically up to twelve months. Money market trades in short-term financial instruments commonly called "paper". This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity.
The heart of the money market revolves around the concept of interbank lending, where banks lend and borrow from each other using financial instruments such as commercial paper and repurchase agreements. These instruments are often valued with reference to the London Interbank Offered Rate (LIBOR) for the specific term and currency.
Finance companies usually secure their funding by issuing substantial amounts of asset-backed commercial paper (ABCP). This paper is backed by the commitment of valuable assets placed into an ABCP conduit. These assets can include things like auto loans, credit card receivables, residential or commercial mortgage loans, mortgage-backed securities, and other financial assets. Some large, financially stable corporations even issue their own commercial paper, while others prefer to have banks issue it on their behalf.
In the United States, federal, state and local governments all issue paper to meet funding needs. States and local governments issue municipal paper, while the U.S. Treasury issues Treasury bills to fund the U.S. public debt:
Money markets serve five functions—to finance trade, finance industry, invest profitably, enhance commercial banks' self-sufficiency, and lubricate central bank policies.[4][5]
The money market plays a crucial role in financing domestic and international trade. Commercial finance is made available to the traders through bills of exchange, which are discounted by the bill market. The acceptance houses and discount markets help in financing foreign trade.
The money market contributes to the growth of industries in two ways:
The money market enables commercial banks to use their excess reserves in profitable investments. The main objective of commercial banks is to earn income from its reserves as well as maintain liquidity to meet the uncertain cash demand of its depositors. In the money market, the excess reserves of commercial banks are invested in near money assets (e.g., short-term bills of exchange), which are easily converted into cash. Thus, commercial banks earn profits without sacrificing liquidity.
Developed money markets help commercial banks to become self-sufficient. In an emergency, when commercial banks have scarcity of funds, they need not approach the central bank and borrow at a higher interest rate. They can instead meet their requirements by recalling their old short-run loans[clarify] from the money market.
Though the central bank can function and influence the banking system in the absence of a money market, the existence of a developed money market smooths the functioning and increases the efficiency of the central bank.
Money markets help central banks in two ways:
The money market plays a crucial role in monetary policy transmission. Recent research by Chen and Valcarcel (2025)[6] demonstrates that money market dynamics significantly influence how monetary policy affects the broader economy. Following work by Keating et al. (2019)[7], their analysis shows that different monetary policy indicators - whether through interest rates or monetary aggregates - can have varying effects on money market behavior. Studies have found that traditional interest rate channels may become less effective during periods of extremely low rates. Chen and Valcarcel (2021)[8] and Belongia and Ireland (2022)[9] document that properly specified money growth rules, particularly using broad monetary aggregates, can provide useful policy guidance during such periods. Their research reveals that money markets exhibit stronger responses to monetary policy shocks in the aftermath of financial crises, especially in less liquid market segments like time deposits, commercial paper, and Treasury securities.
There are two types of instruments in the fixed income market that pay interest at maturity, instead of as coupons—discount instruments and accrual instruments. Discount instruments, like repurchase agreements, are issued at a discount of face value, and their maturity value is the face value. Accrual instruments are issued at face value and mature at face value plus interest.