Financial Markets and Monetary Policy

Financial Markets and Monetary Policy

Financial markets are places where such financial resources as shares, bonds, derivatives and mortgages are traded. Their purpose is to steer capital towards its most productive use.

Banks and other professional investors gather information about a wide range of investment opportunities and invest the savings entrusted to them in the most attractive projects. In practice, though, the future is hard to foresee and such schemes does not always bear fruit. Indeed, considerable sums are sunk in the unsuccessful ones. In addition, financial markets are subject to excesses as players adopt the behaviour of their peers and reinforce existing trends. Despite all its extremes and irrationalities, however, the finance sector performs an important societal function. If people had to save for years to raise the money necessary for an investment themselves, the capital stock and thus also labour productivity would be much smaller.

An increasingly important role in the financial markets is being played by central banks, which fix the base rates for the interest at which the private banks can lend each other money. Moreover, the European Central Bank (ECB) has recently started to intervene itself, buying government bonds in large quantities. The ECB has also taken on the task of supervising the banks and keeping the financial markets stable.

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