A Study of European Financial Integration and Monetary Policy Options
4. Money market development and monetary policy operations The reforms of strategic as well as of operational aspects of monetary policy in the last 20-year period on the one hand, and financial deregulation and innovation (as described in Chapter 3) on the other, are part and parcel of the same process. The operational framework of monetary policy is intimately related to the institutional environment in which it is conducted, and the evolution of the practical aspects of policy-making interplays in a complex way with the general path of market development. For example, the structure of the money market determines the extent and type of open market operations that are feasible; conversely, evidence and experience indicate that favorization by the monetary authorities of market-oriented policy instruments helps to foment a broader market development. In this chapter, we will study to what extent developments in the domestic money markets of our 11 focus countries have altered the conditions for practical monetary policy-making – that is, for the procedures used by monetary authorities to implement policy. An implicit assumption underlying the discussion in the chapter is that studying the domestic conditions in this area may provide important insights to how exposed domestic monetary policy is to competitive forces in the different countries. We will also discuss whether changes in central bank operating procedures have, in themselves, contributed to money market development. The cross-country studies that exist1 consistently indicate that changes in the operative frameworks of central banks have been both effects and drivers of...
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