A key function of financial markets is to share risks, and thus to mitigate the transmission of shocks to the real economy. This column analyses one historical setup in which risk-sharing possibilities in financial markets suddenly increased – the creation of the first central clearing counterparty in 1882 in France in the market for coffee futures. The ability to better hedge coffee prices had real effects and increased trade flows Europe-wide.
Financial regulation and banking
Changes in central banks’ balance sheets are often used as an indicator of monetary policy stance. This column describes the challenges associated with using balance sheet data to analyse policy. Data for 31 advanced and emerging economies reveal a potentially negative, albeit tenuous, relationship between balance sheet policies and monetary policy objectives. The finding calls for more detailed and consistent balance sheet accounting from central banks around the world.
Do investors care about the legal characteristics of sovereign debt? Focusing on the euro area, this column compares sovereign bonds issued under domestic law to those issued under a foreign jurisdiction, which are harder to restructure in a debt crisis since they are out of reach of the borrowing country’s legislature. This legal protection means that foreign law bonds trade at a premium (with lower yields), but only in situations of severe distress such as Greece or Portugal in 2011/2012. In the midst of a crisis, governments can borrow more cheaply by issuing in foreign law.
By affecting the funding capacity of banks, interbank market fragmentation can hinder the smooth transmission of monetary policy and thus impair the provision of credit to the real economy. This column examines the fragmentation of the euro area interbank market in 2011-15, and finds that the size and quality of banks’ exposures to peripheral countries impaired banks’ access to, and increased the price paid for, interbank funding. This important channel of fragmentation risk was stopped by the ECB’s announcement of possible Outright Monetary Transactions in secondary government bonds markets.
The size and nature of an economy have a crucial influence on the measures that can be taken in response to major shocks. This column investigates the forex interventions taken by Switzerland and Israel – two small, open economies – in the wake of the Global Crisis. While discretionary interventions are shown to be preferable when policy rates are strictly positive, this is no longer valid when the effective lower bound is reached and unconventional monetary policy is called for. The transfer of reserve management to a sovereign wealth fund is also discussed.
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23 - 23 November 2018 / London / Morgan Stanley
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26 - 26 November 2018 / Vienna University of Economics and Business, Vienna, Austria / Vienna University of Economics and Business and Agenda Austria
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13 - 15 December 2018 / Seoul, South Korea / Asian and Australasian Society of Labour Economics (AASLE)
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15 - 15 March 2019 / London, Royal Society / UK Network of Environmental Economists (UKNEE)
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28 - 29 March 2019 / European Central Bank, Frankfurt / European Central Bank and the University of Ohio
