Title: The Influence of Financial Changes on Interest Rates and Monetary Policy: A Review of Recent Evidence
Abstract: Changes in financial regulations, markets, and institutions have been altering the relationships between key interest rates and the effective degree of stimulus or restraint in sectors of the economy. Although the complexity of these developments has made them difficult to monitor, statistical evidence relevant to the topic is becoming available. This article reviews a number of recent studies that directly or indirectly consider the influence of financial changes on the behavior of interest rates and the transmission of monetary policy. Before surveying the empirical evidence, it is useful to describe at a conceptual level how financial changes might affect interest rates and the transmission of policy. In principle, changes to the financial system may alter both the equilibrium level of interest rates—that is, the level consistent with a full employment noninflationary economy—and the size of interest rate changes consistent with the maintenance of good economic performance in the face of shocks to output and prices. If mechanisms that rationed credit in the past have been reduced, then more of the burden of credit allocation among potential borrowers will fall on interest rates. Without a perfectly elastic supply of savings at given interest rates, or any increase for other reasons in the amount of loanable funds available, the equilibrium level of rates will be higher. Moreover, if it is true that in the past the nonprice mechanisms tended to bind especially forcefully when interest rates were high and less so when rates were lower, then once these mechanisms have ceased to operate, interest rates may have to rise and fall more
Publication Year: 1990
Publication Date: 1990-01-01
Language: en
Type: review
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Cited By Count: 8
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