News Archive

Over the past decade major regulatory changes in the US and Europe to promote competition among trading venues have made today’s financial markets more fragmented and complex than ever. Information technology, infrastructure enhancement, and arbitrage strategies all help to link trading venues. This EconPol Working Paper, co-authored by EconPol researcher Sophie Moinas, uses a two-venue duopoly model involving strategic risk-averse market-makers to explore a new cross-market linking channel: the interdependence of liquidity providers' inventory costs.

Financial markets routinely experience a variety of frictions that hinder their efficient functioning by impacting price formation. These frictions are usually due to how trading is organized in a market, regulatory constraints, or trading capital. EconPol expert Sophie Moinas (TSE) and her co-authors propose an empirical investigation of the dynamic relationships between funding and market illiquidity measures in the European Treasury bond market. They find that funding illiquidity shocks affect bond market illiquidity and of a weaker, but significant, reverse feedback effect. Their analysis also shows that the responses of individual bonds' market illiquidity to funding illiquidity shocks increase with bond duration, the credit risk of the issuer, and with haircuts.

Traditional retail banking (and, by default, shadow banking) is built on four pillars: SME lending, access to public liquidity, deposit insurance, and prudential supervision. But many shadow financial institutions (money market mutual funds, hedge funds and investment banks) gained access to public liquidity facilities during the 2008 crisis. In this working paper, EconPol expert Jean Tirole and his co-author Emmanuel Farhi, ask whether, in the light of recent developments, it is time to reconsider the time-honored SME lending/regulation/ public liquidity access/ deposit insurance quadrilogy?

Why are macroeconomic imbalances so important in the Eurozone and can the European Commission’s Macroeconomic Imbalances Procedure (MIP) address them? EconPol expert Roberto Tamborini examines critical and alternative views of this procedure. A common thread across alternative views is that the right approach to problems arising from capital movements across a monetary union is the so-called Banking Union, not the MIP. Overall, its critics all contend that the MIP, together with other Eurozone regulations, is conceived as a substitute for (good) federal government that we do not have (or want).

How do German voters feel about euro area reforms? In this working paper EconPol expert Mathias Dolls and co-author Nils Wehrhöfer find that few Germans are willing to accept fiscal risk-sharing through common unemployment insurance. But a majority supports a sovereign insolvency procedure aimed at strengthening market discipline. In their randomized surveys the authors also confronted survey participants with the potentially adverse effects of reforms, which lowered approval rates considerably. The survey results also revealed broad-based acceptance of inner German transfers, but low levels of support for transfers to other euro area member states.