The Functions of Financial Markets

We began by examining the role of money in the economy. The next stage, given the existence of money, is to consider the function of financial markets. It is all too easy to accept the existing institutional structure we observe without understanding its significance, or indeed questioning whether it is even necessary. Moreover, there is a fairly natural tendency to associate financial markets with financial intermediation. That is not really surprising given the quantity of funds that flow through these institutions; after all, the great majority of financial transactions are conducted via a financial intermediary of one sort or another, at least in developed economies. However, from an expositional point of view it is convenient to separate out the function of financial markets — the exchange of financial claims and the part played in that process by financial intermediaries. The importance of the financial institutions is therefore considered separately in the next chapter.