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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.
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Chapter 2: Background Indicators of Economic and Financial Development and Integration

Jens Forssbæck and Lars Oxelheim


Policy-making related to financial and monetary issues interacts in a complex way with the development and overall structure of the domestic financial system. Moreover, cross-national codependencies relating to money and finance are not isolated from corresponding links in other economic areas, and during a phase of increasing internationalization, financial and economic integration interact. Indeed, as we saw in Chapter 1, the concept of financial integration is not isolated from the concept of general economic integration; furthermore, the inconsistent trinity hypothesis presupposes a small economy open to international trade. Although this book focuses on one particular financial market segment in most of its analysis, it is, for the above-mentioned reasons, not possible to abstract totally from other influencing factors. The purpose of this chapter is therefore to make a presentation of the 11 focus countries in terms of a number of key indicators pertaining to the size of the economy, overall economic and financial development, and openness to international trade and investment. A reasonable working hypothesis is that integration in a strictly economic sense is somehow correlated with institutional integration (making no assumption as to the general direction of causality here). We therefore group the countries according to Table 1.1 in Chapter 1 to see whether there is any such general pattern of closer integration (or other similar characteristics) within the subgroups. Throughout this chapter, comparisons with larger economies will also be made in order to put the data presented into a broader perspective. The analysis covers developments in the focus...

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