Chapter 2: The co-evolution of monetary policy and the US financial system: declining effectiveness of US monetary policy
The world has witnessed several prominent political and economic changes since the 1980s. In the economic sphere, one of the most notable was the decreasing importance of fiscal policy and increasing importance of central banking (monetary policy) all around the world. In the words of Mishkin (1995:13) “meanwhile monetary policy has been ever more at the center of macroeconomic policymaking.” Central banks try to reach their targets through mainly exerting influence on the quantities and prices of financial assets. As Friedman (2000b:45) puts it “[m]oving financial markets to an extent sufficient to affect non-financial economic activity is precisely what central banks seek to do.” Since the 1980s, the financial system has experienced a transformation into a much more complex, opaque and bigger system. Financial integration reached unprecedented levels. Meanwhile, central banks abandoned several of their tools and began using more indirect tools. Their regulatory framework has also changed significantly.
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