Money Markets

Abstract

Money markets offer monetary services and short-term finance in the capital market with the credit support of institutional sponsors. Investors finance money market instruments at low interest because their salability on short notice confers an implicit monetary services yield. Low interest attracts borrowers to money markets. The fragile equilibrium depends on collective confidence in the credit quality of instruments supplied to the market. Federal Reserve monetary and credit policies have influenced interest rates and credit intermediated in the money market, especially during the credit turmoil. Permissive regulatory rulings have allowed borrowers to take increasing advantage of low interest funding in money markets via securitization and structured finance—vastly increasing maturity, credit, and liquidity transformation through asset-backed commercial paper, repurchase agreements, and money market mutual funds. Funding in such instruments and runs on these instruments helped to create the credit cycle that culminated in the turmoil of 2007–2009.