money market

money market

Set of institutions, conventions, and practices whose aim is to facilitate the lending and borrowing of money on a short-term basis. The money market is, therefore, different from the capital market, which is concerned with medium- and long-term credit. The transactions that occur on the money market involve not only banknotes but assets that can be turned into cash at short notice, such as short-term government securities and bills of exchange. Though the details and mechanism of the money market vary greatly from country to country, in all cases its basic function is to enable those with surplus short-term funds to lend and those with the need for short-term credit to borrow. This function is accomplished through middlemen who provide their services for a profit. In most countries the government plays a major role in the money market, acting both as a lender and borrower and often using its position to influence the money supply and interest rates according to its monetary policy. The U.S. money market covers financial instruments ranging from bills of exchange and government securities to funds from clearinghouses and certificates of deposit. In addition, the Federal Reserve System provides considerable short-term credit directly to the banking system. The international money market facilitates the borrowing, lending, and exchange of currencies between countries.