Discussion [of “Financial Innovation and the Monetary Aggregates” and “The Monetary Deceleration: What Does It Mean and Why Is It Happening?”]
IF POLICY were as restrictive as Poole suggested, reasoned David Fand, interest rates would have exploded in recent months when nominal GNP was rising sharply. Fand concluded that accelerated innovations in financial markets, such as corporate RPs, "offshore dollars," money-market instrumentsi n the thrift institutions,a nd the growth in money-market mutualf unds, have createda n "invisible"m oney that does not appeari n the conventional figures. He would have gone even further than Porter, Simpson, and Mauskopf in identifying this new money and adding it to conventional M. William Fellner also emphasized the limitations of Poole's conventional aggregates, and went on to argue that households were shifting from financial assets in general to real assets. He noted that the velocity of higher-order aggregates was rising, including aggregates containing some of the new instruments that Porter, Simpson, and Mauskopf had explored. Although he questioned the way the authors' equations were specified, Franco Modigliani found they implied that M1 growth, once adjusted,h as not been very restrictive. Arthur Okun, using the framework Poole had developed many years ago, asked why Poole had not considered whether the LM curve had shifted. In view of the evidence that new financial instruments had shifted it inward, holding interest rates constant was a compromise strategy. If Fellner were correct and the IS curve had shifted outward at the same time, as indicated by an increased demand for real assets, rates should even be raised further, despite the weakness in the monetary aggregates. Poole replied that recent developments had increased the uncertainty about money demand and that this called for paying increased attention to interest rates but not for abandoning the monetary aggregates.