Wednesday, October 31, 2012

Some call it innovation (2)


Steve Keen's recent Business Spectator post linked to noted "an excellent discussion paper from Federal Reserve economists Carpenter and Demiralp, entitled 'Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?'."

On page 5 of that paper we read:

Required reserves, however, fell dramatically just after 1990 following the reduction in required reserve ratios and trended down through 2000, largely as retail sweep programs allowed depository institutions to reduce their reserve requirements.

So that is some of the "rapid financial innovation" of the 1990s, that Mankiw points out, as quoted in the earlier post today.

2 comments:

Luke Smith said...

What specific innovations does Mankiw point to? The only financial innovations (in the past 30 years) I can think of are large government deficits, repurchase agreements (using government debt and MBSs) and petrodollar recycling.

The Arthurian said...

Mankiw does not provide many specifics, Luke. Not in chapter 18 anyway. (I have the fourth edition of his Macroeconomics.)

Deregulation of financial institutions (and improved computer technology) blurred the line between money and near money, he says.