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Changes in market functioning and central bank policy: an overview of the issues

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  • Marvin J. Barth
  • Philip D. Wooldridge
  • Eli M Remolona
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    Abstract

    In recent years, a number of structural developments have had a significant influence on the functioning of financial markets. The most important of these developments are the introduction of the euro, the spread of electronic trading, shifts in the constellation and behaviour of market participants and changes in relative supplies of different assets. There is some evidence that such developments have led to shifts in liquidity among different market segments and, moreover, that market liquidity is less robust than in the past. Furthermore, some of the largest government securities markets have begun to lose their pre-eminence as centres for price discovery about macroeconomic fundamentals, while credit derivative, corporate bond and equity markets are all vying to become the locus for price discovery about credit risk. These changes in market functioning pose various challenges for central bank policy, including what role central banks should play in promoting robust liquidity, how best to gauge market expectations, and whether the conduct of monetary policy operations should be adjusted. This paper served as the background paper for the Autumn Central Bank Economists' Meeting held at the BIS on 15-16 October 2001. In addition to setting out the issues for discussion, it summarises the main findings of the other papers presented at the meeting (the full versions of which can be found in

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    Bibliographic Info

    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 120.

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    Length: 34 pages
    Date of creation: Oct 2002
    Date of revision:
    Handle: RePEc:bis:biswps:120

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    Keywords: market functioning and central bank policy; robust liquidity; structural developments;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Ingo Fender, 2000. "Corporate hedging: the impact of financial derivatives on the broad credit channel of monetary policy," BIS Working Papers 94, Bank for International Settlements.
    2. Upper, Christian, 2000. "How safe was the "safe haven"? Financial market liquidity during the 1998 turbulences," Discussion Paper Series 1: Economic Studies 2000,01, Deutsche Bundesbank, Research Centre.
    3. Michael J. Fleming, 2001. "Measuring treasury market liquidity," Staff Reports 133, Federal Reserve Bank of New York.
    4. Garry J. Schinasi & T. Todd Smith & Charles Frederick Kramer, 2001. "Financial Implications of the Shrinking Supply of U.S. Treasury Securities," IMF Working Papers 01/61, International Monetary Fund.
    5. Jean-Pierre Zigrand & Jon Danielsson & Hyun Song Shin, 2001. "Asset Price Dynamics with Value-at-Risk Constrained Traders," FMG Discussion Papers dp394, Financial Markets Group.
    6. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
    7. Gertler, Mark & Lown, Cara S, 1999. "The Information in the High-Yield Bond Spread for the Business Cycle: Evidence and Some Implications," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 132-50, Autumn.
    8. Gabriele Galati & Kostas Tsatsaronis, 2001. "The impact of the euro on Europe's financial markets," BIS Working Papers 100, Bank for International Settlements.
    9. Bank for International Settlements, 2000. "Stress Testing by Large Financial Institutions: Current Practice and Aggregation Issues," CGFS Papers, Bank for International Settlements, number 14, July.
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    Cited by:
    1. John Hawkins & Paul Masson, 2003. "Economic aspects of regional currency areas and the use of foreign currencies," BIS Papers chapters, in: Bank for International Settlements (ed.), Regional currency areas and the use of foreign currencies, volume 17, pages 4-42 Bank for International Settlements.
    2. Bastidon, C├ęcile & Gilles, Philippe & Huchet, Nicolas, 2008. "The international lender of last resort and selective bail-out," Emerging Markets Review, Elsevier, vol. 9(2), pages 144-152, June.

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