U.s. Monetary Policy in an Integrating World: Discussion

Frank Morris was a good friend, a fellow-navigator in World War II, a fine economist, and a first-rate central banker. I am pleased to participate in this conference honoring him. First, this interesting and intensively researched paper by Richard Cooper and Jane Little is really mistitled. It goes far beyond the influence of foreign events and institutions on U.S. monetary policy. It deals with the effects of the rest of the world on the entire financial system of the United States. To cite just one example, the repeal of Glass-Steagall was, as the authors note, the result of competition from foreign banks and a more liberal regulatory environment in other countries. Whether the repeal will affect the conduct of monetary policy is not a question that the authors address. Second, the Federal Reserve’s shift away from targeting monetary aggregates to the federal funds rate is attributed by the authors to those same innovations and regulatory changes that were driven by events and institutions abroad. No doubt those influences existed. It would stretch history a bit to attribute the shift away from monetary aggregates completely to external influences, and I do not think that the authors hold that view. I believe that the evolution of the domestic financial system, even in the absence of foreign institutions, would have led to greater instability in the demand for money in its various forms and would have induced the Federal Reserve to abandon those aggregates as intermediate targets for monetary policy. A third point: On the topic implied by the title of the paper, the authors provide a very useful historical record. Events abroad going back