Stefano Corradin, Marie Hoerova, Glenn Schepens, 12 February 2021

Euro area money markets have gone through substantial changes and turbulent periods over the past 15 years. These have included the global and euro area sovereign debt crises, new liquidity and leverage requirements, and the expansion of the Eurosystem balance sheet through asset purchase programmes. This column discusses the interaction between money markets, new Basel III regulations, and central bank policies. The analysis shows that money market conditions worsen when financial stress increases, or if central bank asset purchases induce scarcity effects. It outlines implications of changing money market conditions for monetary policy implementation and transmission.

Gordon Liao, Tony Zhang, 01 October 2020

Institutional investors and borrowers often hedge a sizeable portion of their currency mismatches. This column examines the role that this currency hedging of foreign assets and liabilities plays in determining exchange rates. It shows that countries’ hedging demands from their external imbalances can explain forward and spot exchange rate dynamics during the COVID-induced financial turmoil in March 2020, as well as their usage of the Federal Reserve central bank liquidity swap lines.

Olivier Accominotti, Delio Lucena-Piquero, Stefano Ugolini, 23 April 2020

Informational problems on the money market can lead to credit booms and financial panics. This column shows that, during the first globalisation of 1880-1914, uncollateralised international corporate debts were transformed into highly liquid and safe money market instruments through a refined process of information production involving various intermediaries. This suggests that the design of money market instruments is an essential determinant of the liquidity and resilience of money markets.

Fiorella De Fiore, Marie Hoerova, Harald Uhlig, 25 May 2019

Money markets are an important source of short-term funding for banks, which rely heavily on them to cover their liquidity needs. But as this column shows, when money markets do not function smoothly, banks may have to deleverage or increase their holdings of liquid assets, leading to a decline in lending and output. This decline can be mitigated by central banks if they increase the size of their balance sheets.

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