The Declining Power of US Monetary Policy
Chapter 6: Concluding remarks
This book argues that the effectiveness of US monetary policy has been decreasing since the late 1980s. There have been two very important trends in the relationship between the Fed policy rate and financial markets. I call them the dual decoupling: first, the decoupling of the Fed rate from the prices of financial assets (interest rates) and second, the decoupling of the Fed rate from the quantities in financial markets. Both have increased the degree of the endogeneity of price and quantity determinations in financial markets independently of the Fed. In other words, the influence of the Fed in determining the prices (interest rates) and quantities of financial assets (the expansion of balance sheets) has decreased considerably in recent years. This book claims that these developments are the direct product of four factors: i) the transformation of the US financial system, ii) increasing competition, iii) increasing centralization tendencies in the US financial system, and iv) most importantly, decreasing balance sheet constraints on financial firms. These four factors can be understood as the results of four interrelated dynamic forces: rapid innovation in financial markets, deregulation trends in the regulatory framework, policy choices of the Fed and increasing financial integration.
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