Money Markets and Politics

Money Markets and Politics

A Study of European Financial Integration and Monetary Policy Options

Jens Forssbæck and Lars Oxelheim

The dramatic evolution of financial markets in the 1980s and 1990s, accompanied by increasing institutional integration between nations (most notably in the EU), have fostered a widespread belief that governments – particularly those of small economies – have essentially lost the power to pursue sovereign, independent economic policies. At the same time, it is widely assumed that the loss of monetary-policy control is a major opportunity cost for a country adopting a rigid exchange-rate regime or, in the European context, for countries joining the EMU This book sheds light on these arguments.

Preface

Jens Forssbæck and Lars Oxelheim

Subjects: economics and finance, financial economics and regulation, money and banking

Extract

The last quarter-century has been a time of upheaval and transformation in national financial markets, which have become more closely linked to one another to form a global market. An important explanation behind this transformation is the evolution of information technology, which has done so much to undermine the efficiency of the various barriers previously in force. But the development was also fomented by the growing internationalization of banks and businesses. In some countries, policy-makers recognized that the price of retaining a sheltered domestic financial sector was on the rise, and hastened to deregulate their credit systems and financial markets. In other countries, regulators remained wary of the developments, long resisted the forces impelling the internationalization, and insisted on keeping exchange and credit controls in place. Thus the ‘financial globalization’ process has evolved in quite a different way in different countries. At the beginning of the twenty-first century, we can look back and study the different attitudes toward, and the different approaches to dealing with, drivers and effects of the increasing integration of national financial systems into an increasingly global financial market. The different approaches to the necessary transition have had implications for the way monetary policy is pursued. The aim of this book is to offer insights into the link between money market integration and monetary policy options in a European perspective. How and why did money markets evolve and become part of an international money market? What were the aims and the role of national politicians in the...