Background
Call money represents loans that are payable on demand at very short notice. These transactions are predominantly part of the secure and highly liquid money market operations primarily handled by banks and financial institutions.
Historical Context
The concept of call money has been integral to financial markets, particularly in London, for several decades. Its origins date back to the establishment of structured financial systems where short-term liquidity and immediate loan repayability became necessities for maintaining monetary stability.
Definitions and Concepts
Call money is defined as funds lent in the London money market which are repayable on short notice. The predominant characteristic of call money is its high liquidity, making it a crucial element for banks and financial institutions in managing their immediate cash needs and reserve requirements. Due to transaction costs and logistics, these loans typically involve substantial amounts of money.
Major Analytical Frameworks
Classical Economics
In classical economics, call money is seen as an essential asset that maintains the fluidity and liquidity of the money market, allowing for instant adjustments in response to supply and demand shifts.
Neoclassical Economics
Neoclassical economists would view call money supply and demand through the lens of utility maximization and market equilibrium, emphasizing the minimal transaction costs in these high-value transactions.
Keynesian Economics
Keynesian economics would stress the importance of call money in preempting liquidity crises, enabling efficient circulation of funds especially during periods of high financial instability.
Marxian Economics
From a Marxian perspective, call money might be examined as part of financial capitalism which ensures capital mobility but may also potentially contribute to cyclical financial crises due to rapid liquidity movements.
Institutional Economics
Institutional economists would investigate the role of regulatory frameworks, institutional behaviors, and the practical necessities which make large transactions in call money viable and necessary for financial stability.
Behavioral Economics
Behavioral economics might examine the rational versus irrational behaviors of institutions in the lending and borrowing of call money, and how cognitive biases affect decision-making in short-term financial ventures.
Post-Keynesian Economics
Post-Keynesian perspectives would consider call money in terms of endogenous money theories, focusing on the systemic impact on liquidity and financial stability within an evolving economic framework.
Austrian Economics
Austrian economists would critique call money operations by emphasizing the dangers of artificial liquidity and potential disturbances it could cause to the natural interest rate, leading to malinvestment.
Development Economics
In development economics, the role of call money might be less pronounced but could be studied within the broader financial systems of developing countries and their reliance on quick liquidity.
Monetarism
Monetarists would stress the function of call money in managing the money supply, influencing interest rates, and hence ultimately impacting inflation and economic output.
Comparative Analysis
Comparatively, call money serves a universal function across varied financial markets globally, enabling immediate liquidity. Differences arise in terms of regulatory approaches, market efficiency, and the scale of these operations, reflecting the financial maturity and stability of respective economies.
Case Studies
One notable case study involves the 2008 financial crisis where short-term liquidity, including call money, saw immense volatility and represented critical stress points affecting banks’ operational stability.
Suggested Books for Further Studies
- “Money Market- Operations, Structure and Practice” by Baring Asset Management
- “The Evolution of Money Markets” by Lester V. Chandler
Related Terms with Definitions
- Liquidity: The ease with which an asset can be converted into cash without affecting its market price.
- Money Market: A sector of the financial market in which financial instruments with high liquidity and short maturities are traded.
This structured understanding provides thorough insight into the concept of call money, its operational dynamics, significance in the economy, and overlapping implications within different economic frameworks.
