In recent years, a number of structural developments 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,
shifts in the constellation and behaviour of market participants and changes in
relative supplies of different assets. There is some evidence that such
developments have led to shifts in liquidity among different market segments
and, moreover, that market liquidity is less robust than in the past.
Furthermore, some of the largest government securities markets have begun to
lose their pre-eminence as centres for price discovery about macroeconomic
fundamentals, while credit derivative, corporate bond and equity markets are all
vying to become the locus for price discovery about credit risk. These changes
in market functioning pose various challenges for central bank policy, including
what role central banks should play in promoting robust liquidity, how best to
gauge market expectations, and whether the conduct of monetary policy operations
should be adjusted. This paper served as the background paper for the Autumn
Central Bank Economists' Meeting held at the BIS on 15-16 October 2001. In
addition to setting out the issues for discussion, it summarises the main
findings of the other papers presented at the meeting (the full versions of
which can be found in BIS Papers No 12)
