Money Markets in the U.S. and Taiwan

This paper compares and contrasts the money markets and related markets for financial commodities that exist in the U.S. with those in Taiwan. The contrast is enriched because the U.S. markets are larger and more highly developed than those in Taiwan. This difference is enlightening because the two countries are similar in terms of their willingness to let economic competition shape progress.Several decades ago the U.S. markets were what the Taiwan markets are today. But, decades of growth and competition have created an efficient model in the U.S. in which smaller and/or younger countries can emulate if they wish to develop a free market system that is able to grow and compete in the world economy. Taiwan's policy-makers must decide if they want to ignore the U.S. model, copy some parts of the existing U.S. model, or try to pattern their development after the U.S. model as closely as possible.The paper begins by explaining the difference between brokers and dealers. Then the bill markets in the U.S. and Taiwan are compared and the credit guarantees sold by money market dealers in Taiwan are discussed. The market for federal funds in the U.S. is described and it is observed that Taiwan does not have a similar market. The existing markets for bankers acceptances, certificates of deposits (CDs), Eurodollars, and commercial paper in the U.S. and Taiwan are compared and found to be similar in nature, if not in size.The paper also offers suggestions that Taiwan could implement to improve the liquidity and growth of its money market, and this discussion is generalized to Taiwan's broader economic development. Essentially, Taiwan suffers from limited cross-border activity and from its lack of a derivatives market. Derivatives include financial futures contracts, put and call options on economic quantities, swaps, and other hybrid financial instruments. Derivatives markets have been developing rapidly in New York City, Chicago, London, and Tokyo during the past 25 years. The derivatives markets that exist at organized exchanges in these cities are easy to observe, but over-the-counter derivatives market is larger and is growing more rapidly.