Money Market: Functions, Importance, and Impact on Financial Systems

This report examines the money market, detailing its functions and significance in the economy. The money market plays a crucial role in maintaining monetary balance, facilitating short-term transactions, and promoting economic growth. It channels funds to various sectors, supports the implementation of monetary policy, and contributes to capital formation. The report highlights the importance of the money market in financing international and domestic trade, providing funds to businesses, and enabling commercial banks to meet their short-term needs. Furthermore, the report emphasizes the significance of the money market in influencing short-run interest rates, which serves as an indicator for the central bank to adopt better banking policies. The report concludes by providing references to relevant research papers in the field of money market analysis.

Money
Market

Economic Function of Money Market
• To maintain monetary balance
• To maintain balance between demand and supply of money for short term
transactions
• To promote economic growth
• To channelize funds to various sectors in economy
• To maintain and provide mechanism for implementation of monetary
policy in an effectual manner

Cont....
• It helps in capital formation by generating savings and investment in
nation.
• Money market provides funds to banks and financial institutions so that
short term need of money can be fulfilled by them.
• Treasury bills may be issued by the government to raise short term loans.

Importance of Money Market
• Money market is vital as it plays the role in financing international as well
as domestic trade in an effective manner.
• Finance is provided to business traders through bills of exchange.
• The acceptance houses eases in providing financing international trade.
• Profitable investment is observed as excess reserves are utilized by the
banks in a manner which will yield better returns.
• Excess reserves are invested in short term bills of exchange which can be
easily converted into cash.

Cont....
• Commercial banks fulfil their demands through money market by recalling
short term loans.
• It may not need to borrow from central bank at high interest rate.
• Money market are short term loans which are important to meet short term
demands of commercial banks.
• This also helps central bank as short run interest rates in money market
serves as an indicator of monetary conditions in the nation.
• This helps the central bank to adopt better banking policy.

References
Zhang, X., Chen, S. and Liu, Y., 2016. Research on the transmission
mechanism between the money market interest rates and the capital market
interest rates. China Finance Review International. 6(2). pp .110-124.
Strahan, P. E. and Tanyeri, B., 2015. Once burned, twice shy: Money market
fund responses to a systemic liquidity shock. Journal of Financial and
Quantitative Analysis. 50(1-2). pp .119-144.
Fricke, D. and Lux, T., 2015. Core–periphery structure in the overnight money
market: evidence from the e-mid trading platform. Computational
Economics. 45(3). pp .359-395.

Thank
You!!