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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 3: Money Market Formation and Transformation

Jens Forssbæck and Lars Oxelheim


In this chapter, we describe and analyze developments in domestic money markets in our focus countries. The hypothesis is that money markets as a policy environment have become more market-oriented and exposed to competitive forces. The purpose of the chapter is both to analyze and make cross-country comparisons of the (domestic) developments in the markets per se, and to provide a ‘domestic backdrop’ to the subsequent analyses of international interdependencies between markets and policies in later chapters. Money market models typically seem to have problems in explaining crosscountry variations in money market growth and structure. They are, on the whole, of two categories. One of these is purely macro-oriented, and thus too schematic. The other category is more oriented toward explaining interest rate formation and central bank behavior than to forming the basis for comparative accounts of development processes.1 A key feature of this category is the focus on modeling of the demand for bank reserves. We have chosen, therefore, to make a historically based analysis of money market development in the last 20-year period in the 11 countries under review, in order to formulate propositions or hypotheses about the forces behind this development. Special emphasis is given to the political aims and objectives fomenting the process. The analysis is made in three sections: market development and innovations, financial deregulation, and tests of the impact of innovation and deregulation in the money market. The issues of market development and innovation on one hand, and deregulation on the other, are highly...

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