The Consequences of an Ineffective Money Market

The financial and sovereign debt crisis has had a lasting impact on the euro money market. A lack of confidence among market participants and pronounced uncertainty have led to segmentation and are seen as impediments to the effective allocation of liquidity. Assessing an ineffective money market and its possible consequences, however, is likely to require more information than is currently available. In this article, I argue that the pre-crisis situation on the money market is not well suited as a benchmark for effectiveness. Insofar as the prevailing circumstances reflected a bubble, a return to such a situation may not be a desirable outcome, and the money market therefore needs to find a new normal environment. Furthermore, as limited information can impair a normalisation and make it more difficult for the central bank to decide on a given course of action, there is a need to establish greater transparency in the money market.