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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 8: Money Market Development and Monetary Policy Options: Concluding Remarks

Jens Forssbæck and Lars Oxelheim


In this book we have analyzed the interplay between money market development, international money market integration and monetary policy options. Our study objects have been 11 small, open European economies, of which seven are, in 2003, members of the EMU, two are members of the EU but not of the EMU, and two stand outside the EU altogether. Among other things, this composition of countries has enabled us to study the relationship between institutional monetary integration and (domestic) money market structure, as well as between institutionalized international integration and ‘market led’ financial integration in general. The motivation for our study was, broadly speaking, to study the relationship between financial market development/transformation and economic policy choices. We chose to focus on the relationship between money market development and monetary policy choices, with the motivation that the implementation, as well as the underlying ‘philosophy’, of monetary policy have undergone radical changes in most European (and other industrial) countries during the last few decades. These changes have been paralleled by a similar radical development of financial markets – including money markets, which are the main ‘forum’ for the implementation of monetary policy. We argued that these parallel processes are intertwined, and have domestic (political) roots, as well as being greatly influenced by increased cross-border capital mobility. The idea of the development process as a continuous interplay of market outcomes and policy choices is a fundamental underlying hypothesis of the whole study. In the first part of this study, we focused on the domestic dimension...

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