Table Of ContentCURRENT ISSUES IN
FINANCIAL AND MONETA RY
ECONOMICS
CURRENT ISSUES IN ECONOMICS
General Editor: David Greenaway, University of Nottingham
Current Issues in Microeconomics
Edited by John D. Hey
Current Issues in Macroeconomics
Edited by David Greenaway
Current Issues in Labour Economics
Edited by David Sapsford
and Zafiris Tzannatos
Current Issues in International Monetary Economics
Edited by David T. Llewellyn and Chris Milner
Current Issues in Development Economics
Edited by V. N. Balasubramanyam
and Sanjaya Lall
Current Issues in Financial and Monetary Economics
Edited by Kevin Dowd and Mervyn K. Lewis
F orthcoming
Current Issues in Public Sector Economics
Edited by Peter Jackson
Current Issues in Industrial Economics
Edited by John Cable
Current Issues in Welfare Economics
Edited by Nicholas Barr and David Whynes
Current Issues in Agricultural Economics
Edited by A. J. Rayner and David R. Colman
CURRENT ISSUES IN
FINANCIAL
AND
MONETARY ECONOMICS
Editedby
Kevin Dowd and Mervyn K. Lewis
Department 0/ Economies
University of Nottingham
Macmillan Education
ISBN 978-0-333-51640-9 ISBN 978-1-349-21908-7 (eBook)
DOI 10.1007/978-1-349-21908-7
Selection, editorial matter, and Chapter 1 © Kevin Dowd and
Mervyn K. Lewis 1992
Individual chapters © Keith Blackbum, Robin C. Bladen-Hovell,
John Chant, K. Alec Chrystal, Kevin T. Davis and Mervyn K. Lewis,
Charles A. E. Goodhart, Gerald P. O'Driscoll, Jr., Daniel L. Thornton
and Courteney C. Stone 1992
Softcover reprint of the hardcover 1s t edition 1992
All rights reserved. For information, write:
Scholarly and Reference Division,
St. Martin's Press, Inc., 175 Fifth Avenue,
New York, N.Y. 10010
First published in the United States of America in 1992
ISBN 978-0-312-06829-5
Library of Congress Cataloging-in-Publication Data
Current issues in financial and monetary economics I edited by Kevin
Dowd and Mervyn K. Lewis.
p. cm.-(Current issues in economics)
Includes bibliographical references and index.
ISBN 978-0-312-06829-5
1. Monetary policy. 2. Intermediation (Finance) 3. Banks and
banking-Deregulation. I. Dowd, Kevin. 11. Lewis, Mervyn.
III. Series.
HG230.3.C86 1992
332.1-dc20 91-27228
CIP
Contents
LIST OF TABLES vii
LIST OF F1GURES Vlll
SERIES EDITOKS PREFACE ix
NOTES ON THE CONTRIBUTORS xi
LIST OF ABBREVIATIONS XII
1 INTRODUCTION: CURRENT ISSUES IN
FINANCIAL AND MONETARY ECONOMICS
Kevin Dowd and Mervyn K. Lewis 1
2 ALTERNATIVE MONETARY STANDARDS
Charles A. E. Goodhart 15
3 THE NEW THEORY OF FINANCIAL
INTERMEDIAT ION
lohn Chant 42
4 THE OPERATION OF FINANCIAL MARKETS
K. Alec Chrystal 66
5 FINANCIAL INNOVATION: CAUSES AND
CONSEQUENCES
Daniel L. Thornton and Courteney C. Stone 81
6 BANKING REFORM
Gerald P. 0' Driscoll, lr 110
7 DEREGULAT ION AND MONET ARY POLICY
Kevin T. Davis and Mervyn K. Lewis 128
8 CREDIBILITY AND TIME-CONSISTENCY IN
MONETA RY POLICY
Keith Blackburn 155
VI Contents
9 INTERNATIONAL MONETARY POLICY
COORDINAT ION
Robin C. Bladen-Hovell 175
NOTES 195
BIBLIOGRAPHY 209
AUTHOR INDEX 224
SUBJECT INDEX 227
List of Tables
5.1 Financial innovations in 1985 84
5.2 Financial product innovations 86
5.3 Selected measures deregulating deposit-taking
activities, 1970-86 88
5.4 Financial innovations, 1970-82 92
5.5 Standard deviations of monthly corporate bond
yields, 1960-90 94
5.6 Standard deviations of monthly stock index return,
1961-89 94
5.7 Coefficient of variation of month-end to month-end
exchange rates, 1950-87 94
5.8 Sources of funds raised in debt-markets by US
non-financial corporations, 1960-89 95
7.1 Aspects of financial regulation in major industrial
countries 132
VII
List of Figures
4.1 Fr Actuaries 500: price and dividend indices 73
5.1 Ex post real rates, 1959.1 to 1989.4 91
5.2 The income velocity of MI, 1954.1 to 1989.4 97
5.3 The growth of MI velocity, 1954.1 to 1989.4 101
5.4 MI velocity and the 3-month T-bill rate, 1951.1
to 1989.4 105
5.5 The k-ratio and the money-multiplier, 1959.1 to 1989.4 107
5.6 The k-ratio and the 3-month T-bill rate, 1959.1 to
1989.4 107
7.1 Deregulation and the deposit market 144
7.2 Interest -rate deregulation in the IS/ LM framework 148
9.1 Target and instrument conflict 181
9.2 Target and instrument conflict 182
9.3 The gains from cooperation and leadership 183
9.4 The gains from cooperation and leadership 184
viii
Series Editor's Preface
The Current Issues se ries has slightly unusual ongms. Current
Issues in International Trade, which was published in 1987, and
which turned out to be the pilot for the se ries was in fact
'conceived' in the Horton Hospital, Banbury and 'delivered' (in
the sense of completed) in the Hilton International in Nicosia! The
reader may be struck by the thought that a more worthwhile and
enjoyable production process would start and finish the other way
around. I agree! Be that as it may, that is how the series started.
As I said in the Preface to Current Issues in International Trade
the reason for its creation was the difficulty of finding suitable
references on 'frontier' subjects for undergraduate students. Many
of the issues which excite professional economists and which
dominate the journalliterature take quite a time to percolate down
into texts, hence the need for a volume of Current Issues. The
reception wh ich Current Issues in International Trade received
persuaded me that it may be worth doing something similar for the
other subject areas we teach. Thus each volume in this series is
intended to take readers to the 'frontier' of the particular subject
area. Each volume contains nine or ten essays, one of which
provides a general overview while the remainder are devoted to
current issues.
As series editor the main challenge I faced was finding suitable
editors for each of the volumes - the best people are generally the
busiest! I believe, however, that I have been fortunate in having
such an impressive and experienced team of editors with the
necessary skills and reputation to persuade first-dass authors to
participate. I would like to thank all of them for their cooperation
and assistance in the development of the series. Like me, all of
them will, I am sure, hope that this series provides a useful service
to undergraduate and graduate students as weil as faculty.
Current Issues in Financial and Monetary Economics is the sixth
in the series. This has been an area of profound change over the
last decade or so. Fundamental institutional change and a number
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