On the Adequacy of Policy Instruments and Information When the Meaning of Money is Changing

This paper explores how monetary policy should be condusted when the definition and measurement of money are time varying. It suggests that the recent debate about the desirability of controlling monetary aggregates or nominal interest rates is not helpful in a regime where financial innovations are occuring. The first section argues that money should be defined as immediately spendable (or collected) funds and provides empirical evidence that both currency and overnight repurchase agreement and Eurodollar borrowing are more closely related to personal income than different types of bank deposits. The second surveys the adequacy of policy instruments and information available to the Federal Reserve in recent years. The third considers how policy should be condusted in a system that experiences innovations. A filtering approach proposed by Kalchbrenner and Tinsley is recommended. The paper argues that greater and faster data collection are desirable and that even in the best circumstances greater uncertainty about the effects of monetary policy is very likely to obtain. It concludes by recommending that monetary authorities focus on real interest rates, that banks be induced to raise new capital through stock issues, and that Federal Reserve consider introducing real-time reserve accounting.