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Monetary History, Exchange Rates and Financial Markets

Essays in Honour of Charles Goodhart, Volume Two

Edited by Paul Mizen

Monetary History, Exchange Rates and Financial Markets is an impressive collection of original papers in honour of Charles Goodhart’s outstanding contribution to monetary economics and policy. Charles Goodhart has written extensively on many of these topics and has become synonymous with his field; the chapters within this book offer a summary of current thinking on his own research subjects and include perspectives on controversies surrounding them.
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Some concluding comments - Charles Goodhart

Charles Goodhart


Some concluding comments Charles Goodhart I am delighted to be given the last words in these volumes. Let me turn to a few issues that were raised earlier, especially those subjects on which, despite official retirement from the LSE faculty, I hope that I will go on doing work as a member of the Financial Markets Group. The first is related to the chapter presented here by Richard Payne and concerns the micro-structure of the foreign exchange market. One of the stylised facts in this field is that volatility in financial markets is autocorrelated. When there is a major jump, a sharp fluctuation, in markets, markets tend to remain volatile for some time, and when markets are calm, they tend to remain calm for some time. This has been modelled by various GARCH (Generalised Auto Regressive Conditional Heteroskedasticity) or SV (stochastic volatility) type models. But these GARCH and SV models are simply mechanical ways of fitting observations. There is neither institutional knowledge nor theory behind it. The work that Richard and I are doing indicates that if you get a major shock in a market, what happens is that liquidity is absorbed; the limit orders have all been taken up. Moreover, liquidity providers have had something of a shock, and are not necessarily quite sure where things are going. So they become much more reluctant to enter new limit orders. So the limit order book, instead of being nearly horizontal over the relevant range, tends to become much steeper,...

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