Abstract

The Influence of Money Substitutes on Monetary Policy

For the long-term trend in the financial sector of the U.S.A. Goldsmith determined empirically that the share of the banks in the economy’s overall financial assets decreases where there is a steady increase in the share of the intermediary institutions. For Gurley and Shaw this result gives cause for the formulation and theoretical substantiation of the substitution or instability hypothesis according to which money substitution results in a long-term decrease in the demand for money and a loss of efficiency of monetary policy. The objections of the instability hypothesis to monetary stabilization policy as a rational strategy for stabilizing the trend of national income are the subject matter of this analysis. It is shown that the instability hypothesis contains two components of a functional instability. The reduction effect - parallel displacement to the left of the money demand curve - is the long-term expression of money substitution. It is determined by the growth of wealth and must be expressed in the money demand function by the varıable “wealth”. The second component of the insrability hypothesis is the elasticity effect, which finds expression in a change in the degree of liquidity of near monies - defined as the relationship between non-pecuniary yield and the total yield of an asset. Related to the curve of money (demand, the elasticity effect causes a change in the slope. It must be regarded as a short-term effect of money substitution and may go over into the reduction effect. Both effects of money substitution increase the substitution elasticity of near monies relative to money. The intermediaries which issue near monies are in a position to influence demand for money both via the reduction effect by a growing supply of their money substitutes and via the elasticity effect by modifying the degree of liquidity. Near monies affect accumulation of wealth in the amount of the quotient of the nonpecuniary and total yield rate, i.e. in step with the ıdegree of liquidity. Both effects of money substitution influence the overall demand via the interest rate and wealth structure, which may adversely affect a monetary stabilization policy. From the evaluation of the statistical matertal, it can be said for the Federal Republic of Germany in respect of the empirical evidence of the instability hypothesis that - after the growth phase of the intermediaries up to 1957 - measured by the aggregate balance sheet assets of the financial sector - followed a consolidation phase, and from 1966 onwards a slight downward trend is perceptible; - the long-term relative decrease in the demand for money cannot be attributed to the substitution of intermediary assets for money; - the instability hypothesis for periods of monetary restriction can be confirmed neither by substitution of near monies for money nor by an expansive intermediary credit policy; - no relevant long-term influence of near monies on the stability of the money demand function can be perceived