The Money Markets
2.1 CHAPTER OVERVIEW
This chapter explores the markets for borrowing and lending funds over the short term, traditionally known as the money markets. Borrowers include corporations, banks, and governments. Investors include pension funds, insurance companies, corporations, governments, and some retail investors. Money dealers working for major banks provide liquidity to the market by taking in deposits and making loans. Borrowers can also raise funds directly from investors by issuing short-term debt securities which are tradable in secondary markets. A domestic money market is one in which funds are borrowed and lent in the home currency, subject to the authority of the central bank. The largest is for deals made in US dollars contracted inside the United States. This chapter considers the role of central banks such as the US Federal Reserve, the European Central Bank, the Bank of England, and the Bank of Japan in the day-to-day operations of domestic money markets and in setting interest rates. It looks at how governments borrow on a short-term basis by issuing Treasury bills, and at their repo operations. In addition to domestic money markets there is an international wholesale market for borrowing and lending funds traditionally called the Eurocurrency market. It is based in global financial centres such as London. The prefix ‘Euro’ here is historical and is not related to the new European single currency. The chapter reviews the growth of the Eurocurrency ...