Near-money premiums,monetary policy,and the integration of money markets: Lessons from deregulation |
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| Institution: | 1. Board of Governors of the Federal Reserve, 20th Street and Constitution Avenue, Washington D.C. 20551, United States;2. Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, MO 63166-0442, United States;3. Bank for International Settlements, Centralbahnplatz 2, 4051 Basel, Switzerland;1. Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, 60431 Frankfurt am Main, Germany;2. SAFE, GSEFM, Goethe University Frankfurt, Frankfurt am Main, Germany;1. Columbia Business School, USA;1. Department of Economics, Carleton University for James, C-870 Loeb Building, 1125 Colonel By Drive, Ottawa, ON K1S 5B6, Canada;2. School of Accounting and Finance, University of Waterloo, 200 University Avenue West, Waterloo, ON N2L 3G1, Canada;1. International Monetary Fund, Statistics Department, 1900 Pennsylvania Ave NW, 20431 USA;2. Department of Economics, Columbia University, 420 W. 118th Street, New York, NY 10027, United States |
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| Abstract: | The 1960s and 1970s witnessed rapid growth in the markets for new money market instruments, such as negotiable certificates of deposit (CDs) and Eurodollar deposits, as banks and investors sought ways around various regulations affecting funding markets. In this paper, we investigate the impacts of the deregulation and integration of the money markets. We find that the pricing and volume of negotiable CDs and Eurodollars issued were influenced by the availability of other short-term safe assets, especially Treasury bills. Banks appear to have issued these money market instruments as substitutes for other types of funding. The integration of money markets and ability of banks to raise funds using a greater variety of substitutable instruments has implications for monetary policy. We find that, when deregulation reduced money market segmentation, larger open market operations were required to produce a given change in the federal funds rate, but that the pass through of changes in the funds rate to other market rates was also greater. |
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