Financial markets throughout the world have changed substantially in recent years as capital markets have become deeper and broader. In many countries, financial intermediation is increasingly carried out directly in capital markets rather than through such traditional intermediaries as commercial banks. Moreover, complex linkages among global financial markets have increased capital mobility to the point where considerable amounts of funds cross national borders each day. These developments have potentially important implications for monetary policy in the United States and other countries.
To explore the implications of these financial market trends, the Federal Reserve Bank of Kansas City invited central bankers, academics, and financial market participants to a symposium entitled "Changing Capital Markets: Implications for Monetary Policy." The symposium was held August 19-21, 1993, at Jackson Hole, Wyoming.
This article highlights the issues raised at the symposium and summarizes the papers and commentary. The first section of the article provides an overview of the main issues and identifies areas of agreement and disagreement among program participants. The remaining sections summarize the viewpoints of the program participants and their policy recommendations
Over the past decade, two significant trends have emerged in financial markets around the world. First, there has been tremendous growth in domestic capital markets in terms of the volume and value of transactions and in the development of new types of securities. Associated with this growth in capital markets has been an apparent decline in the traditional role of commercial banks, as both depositors and borrowers have sought alternative sources for investment and financing. Second, in response to financial market liberalization around the world, international capital mobility has risen dramatically. Evidence of the significance of this trend can be found most strikingly in the recent turmoil in the European Exchange Rate Mechanism (ERM) but is also apparent in the increased inflow of investment into Latin America and the volatility of Japan's overseas investment.
As Federal Reserve Chairman Alan Greenspan noted in his introductory remarks at the symposium, both of these trends have important implications for monetary policy. If banks play a smaller role or a different role in the financial system, the monetary transmission mechanism may be altered. If so, monetary policy could become less effective or the impact of policy on economic activity may be different than in the past. In addition, it may become more difficult to implement monetary policy. These financial market changes may distort the information provided by traditional policy indicators such as the monetary aggregates. And, the greater capital mobility resulting from increased linkages among financial markets may make it more difficult for central banks to balance domestic policy considerations against international obligations. Finally, both trends have implications for financial stability. Regardless of whether they tend to enhance or diminish the inherent stability of the financial system, these changes in financial markets may complicate the task of central banks in assessing and controlling systemic risk and in responding to financial crises.
Symposium participants debated the significance of these trends and, in the course of their discussion, reached broad agreement on a range of issues. Most participants felt financial market changes have altered the channels through which monetary policy affects the economy but have not impaired the overall ability of central banks to affect economic activity. At the same time, however, there was general agreement these changes have caused operational difficulties for monetary policy by reducing the usefulness of monetary aggregates and by making it more difficult to operate a fixed exchange rate system. …