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

In: Market functioning and central bank policy

  • Marvin Barth

    (Bank for International Settlements)

  • Eli Remolona

    (Bank for International Settlements)

  • Philip Wooldridge

    (Bank for International Settlements)

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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  • Bank for International Settlements, 2002. "Market functioning and central bank policy," BIS Papers, Bank for International Settlements, number 12, March.
  • This item is provided by Bank for International Settlements in its series BIS Papers chapters with number 12-01.
    Handle: RePEc:bis:bisbpc:12-01
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    1. 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.
    2. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
    3. Michael J. Fleming, 2001. "Measuring treasury market liquidity," Staff Reports 133, Federal Reserve Bank of New York.
    4. Bank for International Settlements, 2001. "The changing shape of fixed income markets: a collection of studies by central bank economists," BIS Papers, Bank for International Settlements, number 05, March.
    5. Bank for International Settlements, 2000. "Stress Testing by Large Financial Institutions: Current Practice and Aggregation Issues," CGFS Papers, Bank for International Settlements, number 14, Autumn.
    6. 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.
    7. 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.
    8. 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.
    9. Francis Breedon, 2001. "Market liquidity under stress: observations from the FX market," BIS Papers chapters, in: Bank for International Settlements (ed.), Market liquidity: proceedings of a workshop held at the BIS, volume 2, pages 149-151 Bank for International Settlements.
    10. 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.
    11. Bank for International Settlements, 2001. "Electronic finance: a new perspective and challenges," BIS Papers, Bank for International Settlements, number 07, March.
    12. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
    13. Gabriele Galati & Kostas Tsatsaronis, 2001. "The impact of the euro on Europe's financial markets," BIS Working Papers 100, Bank for International Settlements.
    14. Bank for International Settlements, 2001. "The banking industry in the emerging market economies: competition, consolidation and systemic stability," BIS Papers, Bank for International Settlements, number 04, March.
    15. Craig H. Furfine & Eli M. Remolona, 2005. "Price discovery in a market under stress: the U.S. Treasury market in fall 1998," Working Paper Series WP-05-06, Federal Reserve Bank of Chicago.
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