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Money Markets and Politics

A Study of European Financial Integration and Monetary Policy Options Jens Forssbæck, Researcher, Lund Institute of Economic Research, Lund University, Sweden and Lars Oxelheim, Professor, School of Business and Law, University of Agder (UiA), Kristiansand, Norway, Research Institute of Industrial Economics (IFN), Stockholm and Lund University School of Economics and Management (LUSEM), Lund, Sweden
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.
Extent: 304 pp
Hardback Price: $156.00 Web: $140.40
Publication Date: 2004
ISBN: 978 1 84376 445 8
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  • Economics and Finance
  • Financial Economics and Regulation
  • Money and Banking
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 by examining the relationship between the international integration of domestic money markets and the degree of monetary-policy independence in eleven small, open economies in Europe. The authors address these important issues in the context of a broad-based historical analysis of market formation and growth, exchange-rate policies and deregulation. They find that political motives, in conjunction with competitive forces, path dependence and institutional factors, are a major determinant of market development. Moreover, they reveal that credible commitment to a stability goal is a far more reliable predictor of monetary-policy autonomy than the adoption of a specific exchange-rate regime.

This accessible investigation of the relationship between domestic money-market development, international financial integration and the monetary-policy options available to small, open economies will be welcomed by students and researchers of macroeconomics, financial economics and political economy. The extensive empirical research and original conclusions will also be of interest and benefit to corporate decisionmakers, bankers, policymakers and regulators.
‘Money Markets and Politics offers a bounty of comparative, cross-national statistics that document important money market developments in these eleven countries. The authors have gone to great lengths to present a consistent set of data over a broad range of areas, during a time of remarkable turmoil and change.’
– Jonathon W. Moses, Scandinavian Journal of Economic History

‘This topical book is a valuable contribution, providing interesting and detailed analyses of the developments in financial, monetary and foreign exchange markets across countries, as well as more sophisticated sections that use empirical tools for exploration and modelling. The originality of the approach chosen for the analysis, the diversity of the topics covered and the breadth of the information collected are clearly the book’s primary strength.’
– Natalie Chen, Transnational Corporations

‘The book provides a lucid, painstaking, and insightful analysis of the potentiality for small European “policy taking” countries to conduct monetary policy independently in an era of globalising money markets.’
– Andrew W. Mullineux, SUERF Newsletter

‘These eleven small, open economies teach us a great deal about the behaviour of money and financial markets. This volume sets the standard for investigating them. Any future serious work must take account of this book and build on it.’
– Richard J. Sweeney, Georgetown University, US

‘With eastward expansion of the EU imminent, this book provides an excellent and timely assessment of the impact of monetary and financial integration on small “open economy”, “policy taking” countries in western Europe.’
– Andrew W. Mullineux, University of Birmingham, UK

‘This volume is an original contribution to the literature on the benefits and costs of pursuing monetary and/or financial integration. The authors’ analysis of small, open European economies casts doubts on the traditional conclusion that monetary integration can be explained primarily by economic factors. This book will be valuable to both academics and policy analysts.’
– Niels Thygesen, University of Copenhagen, Denmark
Contents: Preface 1. Introduction 2. Background Indicators of Economic and Financial Development and Integration 3. Money Market Formation and Transformation 4. Money Market Development and Monetary Policy Operations 5. External Arrangements: Exchange Rate Regimes and Capital Controls 6. Measuring Capital Mobility: The Degree of Direct Money Market Integration 7. Monetary Policy Autonomy under Different Institutional Regimes 8. Money Market Development and Monetary Policy Options: Concluding Remarks References Index