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Regulation, bank competitiveness, and episodes of missing money

  • John V. Duca

John Duca reviews three episodes of "missing money," periods during which one of the monetary aggregates was unusually weak. Duca finds that in each of these episodes, an increased regulatory burden on banks encouraged households and firms to bypass the banking system in favor of nonbank financial liabilities and assets. Using a standard analytical framework, he shows how these shifts by investors can lead to cases of missing money and declines in banks' role in providing credit. Duca further shows that increases in bank regulatory burden can create potential problems for analysts in using either interest rates or real-time monetary aggregates as indicators of nominal economic activity. Given these findings, Duca argues that because regulatory changes have implications for conducting monetary policy, the Federal Reserve should continue to have a role in formulating bank regulations.

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File URL: http://www.dallasfed.org/assets/documents/research/er/1993/er9302a.pdf
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Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

Volume (Year): (1993)
Issue (Month): Apr ()
Pages: 1-23

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Handle: RePEc:fip:fedder:y:1993:i:apr:p:1-23
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  1. Poole, William, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, MIT Press, vol. 84(2), pages 197-216, May.
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