Policy Implications of Structural Changes in Financial Markets

Abstract

Economic decisions are goal-seeking choices made under acknowledged constraints. For financial institutions, models of managerial decision making feature environmental constraints of three broad types: technological; market; and regulatory. In principle, a shift in any constraint triggers a reactive reoptimization of an institution's product line, organizational structure, production processes, and demand for factor services. Monetary policy and deposit-institution regulation promote three major economic goals: fostering financial stability; contributing to good macroeconomic performance; and securing efficient patterns of financial intermediation. Politically, agencies responsible for these policies (regulators) simultaneously nurture their own bureaucratic self-interest, sometimes by attempting to intervene advantageously in the sectoral allocation of credit. Conflicts arise not only among these four goals at a given time, but also across time with respect to the intended and unintended effects of particular policies. Policymaking environments may be conceived as sets of evolving economic and political constraints within which an agency's leadership seeks to maximize a stationary

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