Title: Financial market evolution and the interest sensitivity of output
Abstract: Financial markets in the United States have undergone extensive changes in the past three decades. Financial deregulation, increased access to debt and equity markets for large classes of borrowers and investors, a substantially greater degree of internationalization, and innovations in the banking, securities, and financial derivative sectors have all altered the way in which financial markets operate and affect the rest of the economy. One important question emerging from these developments is whether the evolution of the financial sector has altered how monetary policy is transmitted, that is, the ways in which the Federal Reserve's policy initiatives work through various sectors of the economy to affect aggregate output and growth. This article examines one aspect of the policy transmission mechanism, the relationship between interest rates and the growth of output, and attempts to quantify changes in that relationship over the period of recent financial market evolution. Using a simple empirical technique, we examine the sensitivity of the economy to movements in interest rates, that is, the degree to which changes in the level of interest rates ultimately affect economic activity. The basic goal of the analysis is to identify the direction of any systematic changes in the interest sensitivity of the economy over this time. Our primary finding suggests that aggregate real gross national product may have become less sensitive to movements in short-term interest rates during the last three decades. According to our estimates, however, the rate of this decline has not been uniform over the entire period. Instead, our results imply that the interest sensitivity of output decreased during the
Publication Year: 1990
Publication Date: 1990-01-01
Language: en
Type: preprint
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Cited By Count: 5
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