BPEA | 1984 No. 1

Changes in the Financial System: Implications for Monetary Policy

Thomas D. Simpson
Thomas D. Simpson Board of Governors of the Federal Reserve System

1984, No. 1

FOR NEARLY A DECADE, money stock objectives have been announced
publicly by the Federal Reserve Board, and, for much longer, observers
have focused on the money stock as an indicator or guide to monetary
policy. Also in the past decade, the financial system has undergone rapid
change-through spontaneous market developments and regulatory
reforms-and this change has implications for the relationship between
money and other macroeconomic variables. The public has been offered
a growing array of new or modified financial assets, including assets that
can be used for making payments. Negotiable orders of withdrawal
(NOW accounts), which are functionally equivalent to demand deposits
except that they yield interest, have spread nationwide over this period;
moreover, in early 1983 interest-rate ceilings were lifted on those NOW
accounts that qualify, in terms of size, as Super NOWs. In addition,
money market mutual funds have become widely available over this
period, and the money market deposit account has been introduced;
both have limited checking privileges and other transactions capabilities.
Management of cash has also been facilitated by greatly improved
availability of other liquid investments, such as overnight repurchase
agreements and Eurodollars.