Year:    1988

Author:    Karmann, Alexander

Credit and Capital Markets – Kredit und Kapital, Vol. 21 (1988), Iss. 2 : pp. 197–220

Abstract

“Financial Intermediaries and Effective Monetary Policies”

The influence of financial intermediaries on the economy as a whole, which is just minor in importance from a monetarist point of view and is often neglected in highly aggregated Keynesian models, is discussed in liquidity theory-oriented model assumptions for “destabilization” and transmission effects. More recently, this subject has gained in importance as a result of structural change in financial markets caused by innovation.

The model assumptions for the gross saving and investment account allow liquidity and interest effects to be derived. This approach, if confined to a system of financial claims, reduces the customary money multiplier analysis to multisectoral Leontief systems. In addition to an illustrative interpretation of portfolio shift-caused financial multipliers, an analytical framework for liquidity effects that may be empirically tested emerges as a result. If the analysis includes not only financial, but also real assets, this approach extends the standard model to include the sector of financial intermediaries as well, which may cause changes in interest rates as well as interest fluctuations in the transmission process. A simple IS-LM context finally allows a discussion of the monetary policy implications of the structural effects caused by the more recent innovative products financial intermediaries have offered.

The empirical analysis confirms the relevance of a disaggregated analysis of highly variable financial multipliers. The Granger causality analysis also suggests the legitimacy of doubts about the feasibility of an “exact” monetary aggregate and, thus, LM management, which is not unproblematic for current monetary policies in view of the declining interest elasticity of money supply.