IN THIS PAPER I am occupied with whether recent changes in U.S. bank
regulatory policy have made the Federal Reserve less effective as a
central bank than it was. In passing, I am also occupied with how U.S.
regulatory policy may change over the years immediately ahead and
with whether, depending on how the policy changes, the Federal Reserve
is going to end up less effective than it is at present.
For me, effective has a very narrow meaning: the Federal Reserve is
effective to the extent that, by means of (domestic) open market
operations, it can in some appropriate sense control the nominal gross
national product of the United States. Instead of nominal GNP, I might,
of course, have chosen real GNP as the Federal Reserve's target variable
or, alternatively, the average of prices of all goods and services currently
produced by resident companies. Most would agree, however, that
nominal GNP responds, if perhaps with a lag, even to a fully anticipated
change in the Federal Reserve's portfolio of Treasury securities or, in
other words, to a fully anticipated official open market operation. And
by choosing nominal GNP, I avoid the question of how its components,
real GNP and the GNP deflator, respond to anticipated and unanticipated
changes in the Federal Reserve's portfolio of Treasury securities.