IDEAS home Printed from
   My bibliography  Save this paper

Monetary Transmission in a Deregulated Financial System


  • Dirk Morris

    (Reserve Bank of Australia)


Financial deregulation is undermining the traditional role for what academic economists have defined as “money”. The textbook IS/LM models, that rely so heavily on a monetary transmission mechanism running from “money” to activity and prices, may no longer be the most appropriate theoretical models for analysing monetary policy in a deregulated world. Despite this breakdown in the traditional monetary transmission mechanism, it is argued in this paper that monetary policy will continue to be effective in a deregulated environment. Worries that there will be price-level indeterminacy, no yard-stick to measure the stance of policy, and no rules to make monetary policy accountable in a fully deregulated world are not justified. A reaction function which ties the nominal short-term interest rate to a nominal anchor should ensure a stable steady state outcome. There are a number of alternative nominal anchors from which to chose, including: nominal financial prices – the exchange rate or a long-term nominal interest rate; or more direct targets such as inflation or nominal GDP growth. Implementing such policy strategies in the short-run, however, will remain as difficult as ever and optimal strategies may vary across countries. It is nevertheless important that policy reaction functions be clearly stated and adhered to, both to ensure credibility and allow full accountability.

Suggested Citation

  • Dirk Morris, 1988. "Monetary Transmission in a Deregulated Financial System," RBA Research Discussion Papers rdp8811, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp8811

    Download full text from publisher

    File URL:
    Download Restriction: no


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Carmichael, Jeffrey & Harper, Ian R., 1995. "Implementing monetary policy in a deregulated financial system: A study of the Australian official short-term money market," Pacific-Basin Finance Journal, Elsevier, vol. 3(4), pages 409-428, December.
    2. David Parker, 1990. "Monetary Policy under Deregulation," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 23(2), pages 80-91.

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rba:rbardp:rdp8811. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paula Drew). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.