Since the late 1970s, the United States has undergone dramatic financial innovation. New technologies such as computers and ATMs have changed the way that money flows. New types of financial accounts, such as money market and Eurodollar accounts, have changed where and how our money is saved and invested.
Amid this constant economic change and financial innovation, the United States Federal Reserve is responsible for controlling inflation, unemployment and economic growth. They achieve this through their control over the money supply, which directly influences interest rates. Financial innovation has changed the way monetary policy affects financial markets and banks. As a result, financial innovation has significantly altered the Federal Reserve’s ability to influence what it cares about most.
This project takes an empirical look at the last forty years and determines that the effectiveness of the Federal Reserve’s tools for conducting monetary policy has diminished since 1980, with financial innovation playing a significant role in this decline. Less effective monetary policy may not be a problem in a relatively stable economy. However, the results from this study indicate that the Federal Reserve’s ability to use monetary policy to prevent economic downturns in the future may be severely limited.
Micah Pollak , ’05 Fairfield , IA
Majors: Economics & Business and Environmental Studies
Sponsor: Todd Knoop