Market functioning and central bank policy

BIS Papers No 12
August 2002

The papers in this volume were presented and discussed at the Autumn Central Bank Economists' Meeting held at the BIS on 15-16 October 2001. The meeting focused on recent changes in market functioning and their impact on central bank policy. A number of structural developments seem to have had a significant influence on the functioning of financial markets. The most important of these developments are the introduction of the euro, the spread of electronic trading, changes in the constellation and behaviour of market participants and falling supplies of government debt. There is some evidence that such structural changes resulted in shifts in liquidity among different market segments and, moreover, that liquidity is less robust than in the past. The process of price formation and the information conveyed by prices also appears to have been affected. This poses various challenges for central bank policy, including how best to gauge market expectations and conduct monetary policy operations.

Table of contents	Page
List of meeting participants
Developments driving changes in market functioning
Changes in market functioning and central bank policy: an overview of the issues  (PDF: 24 pages, 172 kb) Marvin Barth, Eli Remolona and Philip Wooldridge	1
Implications of declining government debt for financial markets and monetary operations in Australia  (PDF: 18 pages, 265 kb) Malcolm Edey and Luci Ellis	25
The influence of structural changes on market functioning and its implications for monetary policy: a focus on the euro area  (PDF: 22 pages, 180 kb) Laurent Clerc, Françoise Drumetz and François Haas	43
Euro area government securities markets: recent developments and implications for market functioning  (PDF: 21 pages, 437 kb) Roberto Blanco	65
Implications for market liquidity
The effects of bank consolidation on risk capital allocation and market liquidity  (PDF: 24 pages, 617 kb) Chris D'Souza and Alexandra Lai	86
How resilient are financial markets to stress? Bund futures and bonds during the 1998 turbulence  (PDF: 14 pages, 138 kb) Christian Upper and Thomas Werner	110
Electronic trading in Hong Kong and its impact on market functioning  (PDF: 14 pages, 167 kb) Guorong Jiang, Nancy Tang and Eve Law	124
Foreign exchange markets in the 1990s: intraday market volatility and the growth of electronic trading  (PDF: 10 pages, 94 kb) Alain Chaboud and Steven Weinberg	138
Positive feedback trading under stress: evidence from the US Treasury securities market  (PDF: 33 pages, 322 kb) Benjamin Cohen and Hyun Song Shin	148
Implications for asset pricing
The determinants of credit spread changes in the euro area  (PDF: 19 pages, 177 kb) Michael Boss and Martin Scheicher	181
Measuring capital market integration  (PDF: 22 pages, 293 kb) Marina Emiris	200
Interactions between cash and derivatives bond markets: some evidence for the euro area  (PDF: 46 pages, 948 kb) Wolfgang Schulte and Roberto Violi	222
Monetary policy signalling and movements in the Swedish term structure of interest rates  (PDF: 30 pages, 287 kb) Malin Andersson, Hans Dillén and Peter Sellin	268
The information content of the yield curve  (PDF: 31 pages, 965 kb) Hans-Jürg Büttler	298
What central banks can learn about default risk from credit markets  (PDF: 11 pages, 121 kb) Ian Marsh	329
The changing information content of market interest rates  (PDF: 18 pages, 290 kb) Vincent Reinhart and Brian Sack	340
Implications for central bank policy
Inflation targeting in Brazil: shocks, backward-looking prices and IMF conditionality  (PDF: 27 pages, 359 kb) Joel Bogdanski, Paulo Springer de Freitas, Ilan Goldfajn and Alexandre Tombini	358
Market liquidity and the role of public policy  (PDF: 17 pages, 118 kb) Arnaud Marès	385
The monetary policy decisions of the ECB and the money market  (PDF: 10 pages, 131 kb) Vìtor Gaspar, Gabriel Perez-Quirós and Jorge Sicilia	402
Recent changes in fixed income markets and their impact on reserve management by the Netherlands Bank  (PDF: 15 pages, 107 kb) Ad Visser	412
Bank of England open market operations: the introduction of a deposit facility for counterparties  (PDF: 6 pages, 66 kb) William Allen	427
The monetary transmission mechanism in the United States: some answers and further questions  (PDF: 12 pages, 80 kb) Kenneth Kuttner and Patricia Mosser	433