Effectiveness of Monetary Policy and the World Financial System

Abstract

My colleague, Mr Languetin, touched on a number of the things that I wanted to touch on in a slightly different context. From a central-bank perspective the broad subject of financial innovation is of rather pressing interest from two points of view. One is the very conventional point of view, and that is, what does all this mean for the way in which monetary policy will work, and what does it mean in terms of the effectiveness of monetary policy? The second is the intimately related question of how it all bears on the stability of the banking and financial system, and the stability of financial markets. Those two questions, I suggest, are rather intimately interrelated because I think we can all agree on at least a couple of things. Regardless of our precise theoretical persuasions, the fact of the matter is that in one way or another, monetary policy works through financial markets and financial institutions, and because it works through financial markets and financial institutions those markets and those institutions must have the strength and the resilience to be able to deal with the changing monetary environment that exists from time to time and manifested in changes in monetary policy, changes in interest rates and so on.