May 20, 2002


Enclosed for your review is a special issue of the Federal Reserve Bank of New York’s Economic Policy Review devoted to the proceedings of the conference Financial Innovation and Monetary Transmission, held at the Bank on April 5 and 6, 2001.

The overall finding of the conference is that financial innovation, the evolving behavior of firms, and changes in the conduct of monetary policy have altered the ways in which monetary policy affects the economy. At the conference, participants explored whether financial innovation in recent years has affected the monetary transmission mechanism, either by changing the ultimate impact of monetary policy or by altering the channels through which it operates.

The economists from central banks, universities, and the private sector who participated investigated three reasons why they believe monetary transmission has changed recently. First, they looked at the impact of the financial innovations that motivated the conference—such as the growth of asset securitization, shifts between sources of financing for residential investment, or changes in the strength of wealth effects; second, if a change in the way monetary policy is conducted explains what appears to be a change in policy’s effectiveness, when in fact policy has become more effective in reducing economic fluctuations; finally, whether the fundamental structural changes affecting the economy’s stability (and by implication, monetary transmission) may be due to nonfinancial factors, such as improved inventory management.

Among the main conclusions of the papers presented were:

Contact: Linda Ricci
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