Institutional Developments and the Effectiveness of Monetary Policy

Abstract

Institutionalist and post-Keynesian economists have argued very strongly that monetary theory and policy can never be independent of institutional developments in the financial sphere. More specifically, monetary policy is context-specific and monetary rules cannot be applied as a panacea in all economic systems regardless of the institutional framework [Niggle 1990]. The purpose of this article is to explore this proposition in the liglt of recent developments in the U.K. economy. More specifically, and within the spirit of the analysis just referred to and as exemplified in Hyman J. Minsky [1986] and Basil J. Moore [1986], we attempt to show how recent institutional developments in UK financial markets have influenced the effectiveness of monetary policy. This is a broadening of Minsky's theme that In a modem capitalist economy the institution of money is inextricably tied to the institution of banking [Minsky 1986, p. 346]. We do not attempt to provide the theoretical background to the analysis. This is well-known and the reader can find the relevant material in, for example Christopher Niggle [1991] and P. Arestis and A. Eichner (1989). An excellent summary of this theoretical position is

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