Abstract

Money Supply Policy and Financial Innovations

The large number of new financial instruments, changed modes of financial behaviour, persistent shifts in competitive conditions within the credit industry and the progressing internationalization of financial markets have made a policy of planned and foresighted money supply more difficult in recent years in countries undergoing financial innovation. The present contribution analyses the determinants of the phenomenon of financial innovation, which has become more distinctly visible during the second half of the 1970s, as well as its influence on key parameters of the monetary policy transmission and control processes. It has turned out in this context that important basic relations mainly in Anglo-Saxon countries with their specialized banking institutions and originally strictly regulated financial markets, such as the interest and income elasticity of monetary demand as well as the responsiveness of interest rates to overall economic demand aggregates, have undergone change and are as difficult to identify in empirical terms as before. The recent past has not seen any serious structural upheavals in the financial system of the Federal Republic of Germany. The author attributes this to the broad supply of financial services by the all-purpose-bank system in particular, which has always responded to new needs in an elastic way, to the reduced importance of overall economic disruptions causing innovations, to the liberal German financial regulations, and to the hitherto rather conservative preferences of financial market participants in West Germany. Apart from external economic disruptions, the Deutsche Bundesbank has been able in this stable financial environment until recently to determine reliable money supply indicators and to derive and realize trustworthy annual money supply targets from overall key data.