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http://clevelandfed.org/research/workpaper/index.cfm Best available copy Working Paper 8203 A MICRO VIEW OF THE TRANSACTIONS MONEY MARKET by Mark A. Zupan Massachusetts Institute of Technology and Federal Reserve Bank of Cleveland The autnor would like to thank John Carlson, William Gavin, Steven Kaplan, K.J. Kowalewski, William Morris, and E.J. Stevens for their helpful comments and suggestions. Joseph Kalt deserves sincere gratitude for his constant patience, inspiration, and insight. Kathryn Begy provided greatly appreciated typing assistance. Working papers of the Federal Reserve Bank of Cleveland are preliminary materials, circulated to stimulate discussion and critical comment. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. Septemoer 1982 Federal Reserve Bank of Cleveland http://clevelandfed.org/research/workpaper/index.cfm Best available copy A MICRO VIEW OF THE TRANSACTIONS MONEY MARKET Contents I. I n t r o d u c t i o n 11. Models o f t h e Transactions Money Market A. Beginner's Version B. A Toy f o r Intermediates C. 111. A Homogeneous Good, b u t Regulatory Distinctions 8.2. A Nonhomogeneous Good Puzzles f o r Experts ( t o Hand Wave o r Not t o Hand Wave?) Working w i t h t h e Models: A. B. C. IV. B.1. Comparative S t a t i c s Reserve Requirements A.1. F i r s t Cut A. 2. Second Cut Transactions Money P r i c e F l o o r s B.1. The Intermediate Model 8.2. The Imperfect S u b s t i t u t e s Model Innovations Conclusion http://clevelandfed.org/research/workpaper/index.cfm Best available copy A MICRO VIEW OF THE TRANSACTIONS MONEY MARKET Abstract This paper provides a micro-oriented, price-theoretic perspective on the transactions money market. Such a perspective is useful for three reasons. First, it emphasizes that the supply of transactions money will depend on, among other things, the state of technology in the transactions-moneyproducing industry, the price of transactions money, the cost of factors of production utilized to manufacture transactions money, and the prices of substitutes for and complements of transactions money--types of determinants that are commonly taken into account in the specification of a supply curve of commodities other than transactions money but have been given either little attention or ignored in the case of transactions money. Second, a micro perspective can also deal with the fact that transactions money is not a homogeneous good--provided that the costs of transforming/transporting the different money forms to a homogeneous state are specifiable (the divisi a approach to monetary aggregation notably takes a percentage transformation/ transportation cost approach). Third, a micro perspective affords a framework for comparative statics--i .e., for estimating the a1 locative and distributive consequences of such aspects of the market as reserve requirements (a percentage tax on regulated transactions money producers), i nterest-rate cei 1ings (transactions money price floors), and improvements in technology Or innovations (outward shifts of the transactions money supply curve--contrary to the currently popular approach, which models such innovations as inward shifts of the demand curve for transactions money). http://clevelandfed.org/research/workpaper/index.cfm Best available copy - z - I. INTRODUCTION In reviewing the literature on the concept of transactions money and on the nature of the transactions money market, it is surprising to note the tendency with which economists rely on a "macro" perspective. In analyzing and predicting the level of and changes in transactions money variables, economists favor (with the possible exception of Pesek 1976) rule-of-thumb and broad causal arguments at the expense of a more fundamental "microu-oriented (price-theoretic) approach. To determine the supply of transactions money, for example, a money multiplier is standard fare (with assumptions being made about the currency-deposi ts ratio desired by the public and the reserves-deposits ratio maintained by the banks). Little attention is given to the state of technology in the transactions-money-producing industry, the cost of factors of production utilized to manufacture transactions money, the price of transactions money, and the prices of substitutes for and complements to transactions money; yet, these types of determinants typically are taken into account in the specification of a supply curve of commodities other than transactions money. The prevalence of macro perspectives probably derives from the tilt toward macro-analysis in the training of economists studying transactions money. It may also, although less likely, stem from a perception that micro-analysis is either unfruitful in or inapplicable to the case of transactions money. This paper attempts to erode such a perception and to point to how macro-trained economists may benefit from occasionally wearing micro eyeglasses. http://clevelandfed.org/research/workpaper/index.cfm Best available copy Notwithstanding the "back-of-the-envelope" methodology employed below, a micro perspective appears to be both tractable and useful. Its usefulness is two-fold. First, it provides a convenient way of characterizing the transactions money market. Why not treat transactions money as a good produced and consumed by participants in a market (albeit a good with distinctive attributes and a market with pecul iar features)? Second, a micro-oriented approach affords a framework for comparative statics. Once the transactions money market is modeled, "tried-and-tested" micro-analytic techniques exist for estimating the allocative and distributive impacts of such aspects of the market as reserve requirements, transactions money price floors, and changes in technology (innovations). While future work will hopefully put some empirical meat on the theoretical bones assembled here, this paper outlines a method for depicting the market and for undertaking comparative static analyses. It is a skeleton at best--open to criticism and elaboration. Nevertheless, it is intended to show how a micro perspective on the transactions money market may be developed. Benefits from such a perspective will perhaps accrue to academics as well as to "real worldu policymakers who regulate transactions money. 11. MODELS OF THE TRANSACTIONS MONEY MARKET A. Beginner's Version In its simplest form, the transactions money market may be characterized uat i ons: [I] - ? - + S = S(Ptm, TEC, G , Pfop, Ps, PC,...); 121 D = + + - + + + ? + - D(Ptm, TA, Y, POP, DIST, Ps, PC ,...) . http://clevelandfed.org/research/workpaper/index.cfm Best available copy The aggregate s u p p l y of t r a n s a c t i o n s money w i l l be ( c e t e r i s p a r i b u s ) : 1. An i n c r e a s i n g f u n c t i o n o f t h e p r i c e o f t r a n s a c t i o n s money, Ptm. Holding everything e l s e constant, t h a t i s , a r i s e i n t h e p r i c e o f t r a n s a c t i o n s money w i l l r e s u l t i n an i n c r e a s e i n t h e q u a n t i t y o f t r a n s a c t i o n s money s u p p l i e d . 2. An i n c r e a s i n g f u n c t i o n o f t h e l e v e l o f t e c h n o l o g y , TEC, a v a i l a b l e t o f i r m s m a n u f a c t u r i n g t r a n s a c t i o n s money. I n n o v a t i o n s such as EFT and ATM, f o r example, w i l l s h i f t t h e s u p p l y o f t r a n s a c t i o n s money outward. 3. An u n c e r t a i n f u n c t i o n of t h e g o a l s , G, of transactions- moneyp r o d u c i n g f i r m s - - d e p e n d i n g on whether t h e s e f i r m s a r e sales- maximizers, s a t i s f i c e r s , o r p r o f i t - m a x i m i z e r s . 4. A decreasing f u n c t i o n o f t h e p r i c e o f t h e f a c t o r s o f production, u t i l i z e d i n t h e manufacture of t r a n s a c t i o n s money- - labor fo (e.g:, t e l l e r s ) , c a p i t a l (e.g., computers), e n e r g y (e.g., 1i g h t i n g o r h e a t i n g e x p e n d i t u r e s ) , and high- powered money. A r i s e , f o r i n s t a n c e , i n t h e c o s t o f high- powered money- - via an i n c r e a s e i n t h e d i s c o u n t r a t e o r open m a r k e t purchases o f s e c u r i t i e s b y t h e F e d e r a l R e s e r v e - - w i l l s h i f t t h e s u p p l y o f t r a n s a c ~ t i o n smoney i n w a r d ( o t h e r things equal). 5. A d e c r e a s i n g f u n c t i o n o f t h e p r i c e o f s u b s t i t u t e s , Ps (e.g., barter). 6. An i n c r e a s i n g f u n c t i o n o f t h e p r i c e o f complements, m a r k e t p l aces) . PC (e.g., The aggregate demand f o r t r a n s a c t i o n s money w i l l be ( c e t e r i s p a r i b u s ) : 1. A d e c r e a s i n g f u n c t i o n o f t h e p r i c e o f t r a n s a c t i o n s money. 2. An i n c r e a s i n g f u n c t i o n of t h e i n t e n s i t y f o r t r a n s a c t i o n s money. The demand f o r expected t o s h i f t outward, f o r example, renounce t h e i r b e l i e f s i n communism and the tenets o f libertarianism. 3. An i n c r e a s i n g f u n c t i o n o f an economy's p e r c a p i t a income l e v e l , Y ( p r o v i d e d t h a t t r a n s a c t i o n s money i s a normal good). 4. An i n c r e a s i n g f u n c t i o n of an economy's p o p u l a t i o n , POP. 5. An u n c e r t a i n f u n c t i o n o f t h e d i s t r i b u t i o n o f income i n an economy, DIST. 6. An i n c r e a s i n g f u n c t i o n o f t h e p r i c e o f s u b s t i t u t e s . , A d e c r e a s i n g f u n c t i o n o f t h e p r i c e o f complements. o f p r e f e r e n c e s o r t a s t e s , TA, t r a n s a c t i o n s money can be i f t h e members o f an economy decide t o l i v e according t o http://clevelandfed.org/research/workpaper/index.cfm Best available copy The interaction of the above-outlined supply and demand equations will determine, according to standard economic analysis, the prevailing price and quantity of transactions money in the economy. Leaving aside for now the issue of a precise definition of transactions money, demanders (i .e., consumers) of transactions money are assumed to include both firms and individuals. Suppliers of transactions money are presumed to consist of all firms manufacturing a product capable of being used for making payments. Transactions money producers, therefore, will include not only banks but also money market mutual funds, credit card companies, and any other establishments that supply a good having the ability to serve as a payments mechanism. €3. A Toy for Intermediates The beginner's version of the transactions money market fails to account for two significant features of the market: 1) the presence of a complex regulatory matrix; and 2) the fact that transactions money is not a homogeneous good. While the former characteristic may be readily incorporated into a micro-analytic model, the latter makes such a model problematic if not intractable. 13.1. A Homogeneous Good, but Regulatory Distinctions The transactions money market is subject to a plethora of federal and state regulations--reserve requirements, interest-rate ceilings, capital and insurance requirements, proscriptions against vertical and horizontal integration by suppliers (e.g., the McFadden Act), credit controls, subsidized check-clearing services, and entry restrictions (e.g., International Banking http://clevelandfed.org/research/workpaper/index.cfm Best available copy A c t of 1978). t h e y do not, meaningless. While t h e presence and e x t e n t o f these r e g u l a t i o n s have varied, per se, r e n d e r a m i c r o approach t o t h e t r a n s a c t i o n s money market I n f a c t , p r o v i d e d t h a t a l l forms o f t r a n s a c t i o n s money a r e p e r f e c t s u b s t i t u t e s (e.g., currency, demand d e p o s i t s , money market mutual funds), m i c r o - a n a l y s i s o f t h e e f f e c t o f these r e g u l a t i o n s may prove q u i t e fruitful. To s t a r t w i t h t h e s i m p l e s t case, assume t h a t o n l y f e d e r a l r e g u l a t i o n s e x i s t ( v i a t h e F e d e r a l Reserve System) and t h a t o n l y one o f two s e c t o r s o f t h e domestic transactions- money- producing i n d u s t r y f a l l s under t h e auspices o f t h e Fed; t h e o t h e r s e c t o r i s c o m p l e t e l y unregulated. As l o n g as t h e good (i.e., t r a n s a c t i o n s money) produced b y t h e two s e c t o r s i s homogeneous, t h e t r a n s a c t i o n s money market may be d e p i c t e d by F i g u r e 1, where Stmr represents t h e supply o f t r a n s a c t i o n s money r e g u l a t e d by t h e Fed, Stmu r e p r e s e n t s t h e supply o f u n r e g u l a t e d t r a n s a c t i o n s money, and S i s t h e aggregate s u p p l y of t r a n s a c t i o n s money i n t h e economy. Several p o i n t s a r e i n o r d e r about a F i g u r e 1 conception o f t h e t r a n s a c t i o n s money market. F i r s t , b o t h Stmr and Stmu a r e f u n c t i o n s o f t h e Figure 1 Regulated S e c t o r Unregulated S e c t o r trn Transactions Money Market 'tmu P* P* - a - I I I Q*tmr Qtmr Q*tmu Qtmu Q* Q http://clevelandfed.org/research/workpaper/index.cfm Best available copy same f a c t o r s as S ( s e e e q u a t i o n 1 above). magnitude o f Stmr Second, t h e r e l a t i v e s l o p e and and Stmu need n o t be i d e n t i c a l ( t h e i r r e l a t i v e s l o p e and magnitude i n F i g u r e 1 a r e intended f o r e x p o s i t i o n and n o t f o r a c c u r a t e representation). A1 1 t h a t m a t t e r s i s t h a t r e g u l a t e d and unregulated t r a n s a c t i o n s money a r e p e r f e c t s u b s t i t u t e s ( i.e., p r i c e , P*). T h i r d , t h e aggregate s u p p l y o f t r a n s a c t i o n s money i s determined by t h e h o r i z o n t a l sum o f Stmr example, Q*tmr j u s t P*). t h a t t h e y s e l l a t t h e same + QktmU = and Stmu. A t t h e p r e v a i l i n g p r i c e P*, for Q* ( t h i s w i 11 be t h e case a t any p r i c e l e v e l , n o t Fourth, t h e p r i c e of t r a n s a c t i o n s money i s s t i l l determined by t h e i n t e r a c t i o n o f t h e aggregate supply, S, and demand, D, f o r t r a n s a c t i o n s money--as was t h e case i n t h e b e g i n n e r ' s version. F i n a l l y , t h e supply o f t r a n s a c t i o n s money can be broken down i n t o n o t o n l y two b u t i n t o any number of Sectors- - depending on t h e " segmentation e f f e c t s " o f e x i s t i n g f e d e r a l and s t a t e r e g u l a t i o n s and t h e e x t e n t t o which such r e g u l a t i o n s a r e deemed t o be of relevance t o an o b j e c t i v e examination of t h e t r a n s a c t i o n s money market. T h e o r e t i c a l l y , a t l e a s t , t h e r e c o u l d be n s e c t o r s as l o n g as t h e goods b e i n g produced by a l l of t h e d i f f e r e n t s e c t o r s were homogeneous. 8.2. A Nonhomogeneous Good Ift h e p r o d u c t s manufactured b y t r a n s a c t i o n s money s u p p l i e r s a r e n o t a l l p e r f e c t s u b s t i t u t e s , a F i g u r e 1 d e p i c t i o n o f t h e t r a n s a c t i o n s money market does n o t apply. Some v e r s i o n o f such a c o n c e p t i o n might be redeemed, however, i f t h e nonhomogeneous goods c o u l d be t r a n s f o r m e d / t r a n s p o r t e d t o t h e " p e r f e c t t u t e s s t a t e u a t e i t h e r constant, f i x e d , o r percentage c o s t . Suppose, f o r example, t h a t t h e r e a r e two t y p e s o f t r a n s a c t i o n s mon y market mutual funds (MMMFs) and demand d e p o s i t s . MMMFs d i f f e r f r o m demand d e p o s i t s i n t h a t t h e former serve as a s t o r e o f value, i n a d d i t i o n t o http://clevelandfed.org/research/workpaper/index.cfm Best available copy b e i n g used as a medium of exchange. Suppose a l s o t h a t MMMFs a r e t r a n s f o r m a b l e / t r a n s p o r t a b l e i n t o demand d e p o s i t s a t c o n s t a n t c o s t - - i t t a k e s $0.05 t o s h i p $1.00 o f MMMFs t o a demand- deposit account. This s i t u a t i o n i s r e p r e s e n t e d i n F i g u r e 2, where SMMMF i s t h e s u p p l y o f MMMFs, SDD i s t h e s u p p l y o f demand d e p o s i t s , and S tMMMF i s t h e s u p p l y o f p u r e t r a n s a c t i o n s money i n h e r e n t i n SMMMF (SMMMFi s transformable/transportable i n t o demand d e p o s i t s a t a c o n s t a n t c o s t o f A6 = $0.05). F i g u r e 2 d i f f e r s f r o m F i g u r e 1 o n l y i n t h a t t h e aggregate s u p p l y o f t r a n s a c t i o n s money i n t h e economy, S, i s determined b y t h e h o r i z o n t a l sum o f st^^^^ and s~~ hotS~~~~ . and SDD) A t t h e p r e v a i 1i n g p r i c e P*tm, t h a t i s , Q* = Q*DD + QtMMMF ( n o t Q* = Q*DD + Q*MMMF). Analogous t o F i g u r e 1, F i g u r e 2 may be g e n e r a l i z e d t o t h e n - s e c t o r c a s e - - w i t h t h e s u p p l y emanating f r o m each s e c t o r b e i n g t r a n s f o r m a b ~ e / t r a n s p o r t a b l e i n t o " p u r e " t r a n s a c t i o n s money a t a c o n s t a n t c o s t ( n o t e t h a t transformation/transportation c o s t s may v a r y a c r o s s s e c t o r s ) . As a f u r t n e r g e n e r a l i z a t i o n , t h e transformation/transportation c o s t need n o t be c o n s t a n t . The c o s t may be a f i x e d o r p e r c e n t a g e c o s t . It i s Figure 2 MMM Fs Demand D e p o s i t s T r a n s a c t i o n s Money Market http://clevelandfed.org/research/workpaper/index.cfm Best available copy interesting to note that a divisia measure of the quantity of transactions money (see, for example, Barnett and Spindt 1982) opts for essentially a percentage transformation/transportation cost approach. An economist relying on a divisia measure attempts to ascertain the percentage of each particular form of transactions money that is "pure." A weight ranging from zero on up is assigned to each form of transactions money--the greater magnitude of the weight, the purer the transactions money form. Weights are determined by the user cost of each form of transactions money--by the extent to which the return on a particular form of transactions money to the consumer is less than the return on an asset valued primarily for its attribute of serving as a store of value. A divisia measure is thus a weighted average of various forms of transactions money--not a simple sum as are M-1, M-2, M-3, and L. In the two-sector case (pure and nonpure), a divisia approach to deriving an estimate of the aggregate supply of transactions money may be represents the supply of pure transactions tmp nts the supply of nonpure transactions money, and S ttmn depicted in Figure 3, where S money Y Stm represents the supply of pure transactions money inherent in the supply of nonpure transactions money. Nonpure Transactions Money Pure Transactions Money Sector Sector Transactions Money Market http://clevelandfed.org/research/workpaper/index.cfm Best available copy The s i t u a t i o n d e p i c t e d i n F i g u r e 3 d i f f e r s f r o m F i g u r e 2 o n l y i n t h e f a c t t h a t t h e transformation/transportation c o s t i s n o t c o n s t a n t - - i t i s a percentage c o s t ( A B f C D ) . a c o n s t a n t percentage. 'tmn The v e r t i c a l d i s t a n c e between Stmn and Sttmn i s The e x t e n t t o which Sftmn i s an i n w a r d p i v o t o f depends ( m o n o t o n i c a l l y ) on t h e " p u r e moneyness" w e i g h t ( r a n g i n g f r o m 0 t o 1) assigned t o t h e nonpure f o r m o f t r a n s a c t i o n s money ( v i a c a l c u l a t i o n o f u s e r c o s t as d e s c r i b e d above). The l o w e r t h e w e i g h t , t h e f u r t h e r i n w a r d i s the pivot. A d i v i s i a measure o f t r a n s a c t i o n s money a d m i t t e d l y m i g h t be f r a u g h t w i t h difficulties. I t would be an i n a p p r o p r i a t e t e c h n i q u e , f o r example, i f nonpure t r a n s a c t i o n s money c o u l d n o t be r a r e f i e d v i a a p p l i c a t i o n of t h e aboved e s c r i b e d transformation/transportation c o s t m e t h o d - - i f t h i s were t h e case, however, s i m p l e a g g r e g a t i o n of a l l i m p e r f e c t l y s u b s t i t u t a b l e forms o f t r a n s a c t i o n s money would a l s o be i n c o r r e c t . The d i v i s i a approach would a l s o p r o v e troublesome i f t h e assigned " p u r e moneyness" w e i g h t s were i n a c c u r a t e ; i.e., i f u s e r c o s t s were n o t a r e l i a b l e i n d i c a t o r o f t h e pureness o f v a r i o u s forms o f t r a n s a c t i o n s money. A t f i r s t glance, however, a d i v i s i a approach seems t o h o l d p o t e n t i a l f o r b e i n g a s u p e r i o r method f o r a s c e r t a i n i n g t h e s u p p l y o f t r a n s a c t i o n s money i n an econorny, The b r o a d e r t h e monetary aggregate under examination, t h e more a c c u r a t e w i l l be t h e d i v i s i a approach; n o t e t h a t d i v i s i a and simple- sum e s t i m a t e s d i v e r g e more f o r M-2 o r M-3 t h a n f o r M- 1- - the s u b s t i t u t a b i l i t y o f ney forms i n c l u d e d i n M-1 i s g r e a t e r t h a n f o r t h o s e forms i n c l u d e d i n M-2 -3. F i n a l l y , one co s t o r e - o f - v a l u e and mediu inseparable. p e c u l a t e about what would happen as t h e xchange a t t r i b u t e s o f money become more I n t h e n e a r f u t u r e , f o r example, a n a l y s t s f o r e s e e MMMFs o p e r a t i n g w i t h no l i m i t s on check s i z e ( c u r r e n t minimum l i m i t s range f r o m $5 http://clevelandfed.org/research/workpaper/index.cfm Best available copy t o $1,000) and r e l a t i v e l y s m a l l e r i n i t i a l d e p o s i t requirements ( c u r r e n t l y around $1,000). If t e c h n o l o g i c a l advances p e r m i t MMMFs t o o f f e r such accounts, one would expect t h e amount o f p u r e t r a n s a c t i o n s money i n an economy (measured along d i v i s i a 1i n e s ) t o d e c l i n e d r a s t i c a l l y . Furthermore, as t h e stock ( s t o r e - o f - v a lue) and f l o w (medium-of -exchange) a t t r i b u t e s of money become f u r t h e r i n t e r t w i n e d ( " bundled t o g e t h e r " ) , i t would f o r e s e e a b l y become more d i f f i c u l t f o r policymakers t o e f f e c t monetary p o l i c y v i a c o n t r o l o f b a s i c monetary aggregates. C. Puzzles f o r E x p e r t s ( t o Hand Wave o r Not t o Hand Wave?) If t h e p e r f e c t s u b s t i t u t e s case does n o t a p p l y and i f t h e t r a n s f o r m a t i o n / t r a n s p o r t a t i o n c o s t remedy i s i n a p p l i c a b l e , m i c r o - a n a l y s i s of t h e t r a n s a c t i o n s money market becomes q u i t e d i f f i c u l t . approaches a r e a v a i l a b l e . arguments. I n t h i s " puzzle f o r e x p e r t s " case, two F i r s t , one can f a l l back on broad causal If,f o r instance, nonpure and p u r e t r a n s a c t i o n s monies e x i s t and are i m p e r f e c t s u b s t i t u t e s , t h e f o l l o w i n g l i n e o f reasoning m i g h t be adopted when t h e demand f o r nonpure t r a n s a c t i o n s money s h i f t s outward: 1) t h e p r i c e and q u a n t i t y o f nonpure t r a n s a c t i o n s money w i l l r i s e ; 2) t h e demand f o r p u r e t r a n s a c t i o n s money ( a s u b s t i t u t e f o r nonpure t r a n s a c t i o n s money) w i 11 s h i f t t r a n s a c t i o n s money w i 11 oney w i 11 r i s e , e o r decrease (depending on t h e r e l a t i v e slopes and t h e e x t e n t of s h i f t s o f t h e p u r e t r a n s a c t i o n s money s u p p l y and t i o n between http://clevelandfed.org/research/workpaper/index.cfm Best available copy - 12 - the alternative transactions money forms. Such estimation, however, would probably be subject to severe multicollinearity problems. Specifically, a properly specified system of equations would have to include the prices of substitute goods--prices that, depending on the number of transactions money forms that are deemed to be substitutes, tend to be extremely collinear. 111. WORKING WITH THE MODELS: COMPARATIVE STATICS It is possible to analyze the effects of various regulatory and institutional aspects of the transactions money market. This section will focus on the allocative and distributive consequences of three such aspects: reserve requirements, transactions money price floors, and innovations. The comparative statics of these three aspects will be examined in the context of the intermediate model--i.e., under the assumption that the supply of tions money may come from either a regulated or an unregulated sector and that the good produced by both of these sectors is homogeneous. This approach is adopted for the sake of simplicity in exposition. Whenever possible, however, modifications of the intermediate model will be noted--modifications necessitated by either the perfect-substitutes-wi th transformation/transpor the imperfect substitutes cases. A. Reserve Requirements Reserve requirements (RR) force producers of regulated transactions money to hold a fixed percentag erves (either vault c Fed) against the amount of deposits (transacti osits with the Y SUPP~Y. http://clevelandfed.org/research/workpaper/index.cfm Best available copy RR can t h u s be viewed as a p e r c e n t a g e t a x - - f o r e v e r y d o l l a r o f o u t p u t produced by r e g u l a t e d s u p p l i e r s , a p r o s c r i b e d f r a c t i o n of t h a t o u t p u t must be h e l d i n t h e f o r m o f s t e r i l e r e s e r v e s ( n o i n t e r e s t accrues t o banks f r o m v a u l t cash o r d e p o s i t s a t t h e Fed). A.1. F i r s t Cut C h a r a c t e r i z i n g RR as a percentage t a x on p r o d u c e r s o f t r a n s a c t i o n s money r e g u l a t e d by t h e Fed, t h e e f f e c t s o f such a t a x a r e d e p i c t e d i n F i g u r e 4, where Sitmr i s t h e s u p p l y of t r a n s a c t i o n s money f r o m t h e r e g u l a t e d s e c t o r a f t e r t h e i m p o s i t i o n o f t h e RR t a x , S' i s t h e t o t a l s u p p l y o f t r a n s a c t i o n s money f o l l o w i n g t h e i m p o s i t i o n of t h e RR t a x , and a l l o t h e r symbols a r e as before. The a l l o c a t i v e e f f e c t s o f t h e RR t a x ( c e t e r i s p a r i b u s ) i n c l u d e : 1. An i n c r e a s e i n t h e p r i c e o f t r a n s a c t i o n s money f r o m Pktm t o PItm. 2. A decrease i n t h e t o t a l q u a n t i t y of t r a n s a c t i o n s money s u p p l i e d f r o m Q*t o Q ' . Figure 4 Regulated S e c t o r Q ' t m r Q*tmr Unregulated Sector * tmu Q ' t m u T r a n s a c t i o n s Money M a r k e t Qtmu Q' Q* Q http://clevelandfed.org/research/workpaper/index.cfm Best available copy 3. An increase in the quantity of unregulated transactions money fram Q*tmu to Q' tmu- 4. A decrease in the quantity of regulated transactions money fram Q*tmr to Q'tmr- 5. A deadweight loss to the economy represented by area ABC. The distributive effects of the RR tax (ceteris paribus) include: 1. A loss to consumers of transactions money equal to area P*tmP'tmAB. 2. A gain to producers of unregulated transactions money represented by area JKTE. 3. A gain/loss to producers of regulated transactions money--depending on whether the beneficial effect of an increase in the price of transactions money (area LMHG) outweighs/is outweighed by the deleterious effect of the RR tax (area NHF). 4. A gain to the RR tax collector (i.e., the Fed) equal to area NGR. The net value of the distributive effects of the RR tax will be negative and equal to area ABC--the deadweight loss from the tax to the economy as a whole. antify the above-out 1 ined a1 locative and distributive effects (aka the triangles-and-rectangles-approach to economics), one would need to know: 1. The own-price elasticity of the demand for transactions money. 2. The quantity of transactions money produced by both the regulated and unregulated sectors, either before or after the tax. 3. The elasticities of the supply curves for regulated and unregulated transactions money. The f i rst-cut . tation of the RR tax may be refined in several First, under the Depository Institutions Deregulation and Monetary http://clevelandfed.org/research/workpaper/index.cfm Best available copy - 15 - C o n t r o l A c t of 1980, KK a r e scheduled t o be phased i n b y September 3, 1987, f o r a l l d e p o s i t o r y i n s t i t u t i o n s , i n c l u d i n g commercial banks, mutual s a v i n g s banks, s a v i n g s and l o a n a s s o c i a t i o n s , c r e d i t unions, agencies and branches o f f o r e i g n banks, and Edge c o r p o r a t i o n s ; p r e v i o u s l y o n l y member banks were s u b j e c t t o t n e RR t a x . I n a d d i t i o n , r e s e r v e r e q u i r e m e n t s a r e scheduled t o be 3 p e r c e n t f o r n e t t r a n s a c t i o n accounts up t o $26 m i l l i o n and 12 p e r c e n t f o r any amount o f n e t t r a n s a c t i o n accounts o v e r $26 m i l l i o n . The p h a s e - i n o f t h e new RR t a x schedules may be r e p r e s e n t e d b y t h e outward p i v o t i n g o f t h e Sttmr c u r v e i n F i g u r e 5 toward t h e Stmr c u r v e ( t h e RR t a x was h i g h e r f o r r e g u l a t e d f i r m s p r i o r t o t h e passage o f t h e Monetary C o n t r o l A c t ) . The i m p o s i t i o n o f a RR t a x on p r e v i o u s l y u n r e g u l a t e d p r o d u c e r s can be characterized by e i t h e r subdividing t h e unregulated sector i n F i g u r e 4 i n t o " newly n r e g u l a t e d and u n r e g u l a t e d s e c t o r s (e.g., MMMFs a r e s t i 11 n o t s u b j e c t t o t h e RR t a x ) o r e l s e b y t r a n s f e r r i n g t h e unregulated supply curve i n t o the regulated sector. regulated portion o f the The l a t t e r approach i s shown i n F i g u r e 6, where Sttmr i s t h e s u p p l y o f r e g u l a t e d t r a n s a c t i o n s money Figure 5 Regulated S e c t o r o f t h e T r a n s a c t i o n s Money Market http://clevelandfed.org/research/workpaper/index.cfm Best available copy after implementation of the Monetary Control Act, S g t m uis the supply of unregulated transactions money after implementation of the Monetary Control Act, and all other symbols are as before. 'tmr Note that - 'tmu - "tmr -I. "tmu = S. Whether the deadweight loss of the RR tax will increase with the + implementation of the Monetary Control Act will depend on the relative impacts of: 1) the decreased tax on previously regulated producers and 2) the imposition of a RR tax on a portion of the previously unregulated sector. The fact that net transactions accounts exceeding $26 million are taxed at a 12 percent rate rather than at a 3 percent rate may be considered by distilling from the regulated sector those firms with net accounts greater than $26 million and representing the supply curves of such firms as shown in Figure 7; Where SZ6 is the supply curve for a representative firm with net transactions accounts greater than $26 million and S'26 is the supply curve for such a firm after imposition of the RR tax (Monetary Control Act Figure 6 Regulated Sector Unregulated Sector http://clevelandfed.org/research/workpaper/index.cfm Best available copy Figure 7 Regulated Transactions Money Producerswith Net Transactions Accounts > $26 Million tm j6 I 1 7 I $26 Million version). tm Note that the new supply curve is discontinuous at the quantity of $26 million--representing the fact that the marginal tax rate jumps from 3 percent to 12 percent at this point. Second, the first-cut depiction of the RR tax does not account for the transactions money might hold reserves even in the (1979) conjectures that, without RR, producers would hold 1 percent reserves. Estimates of the he nonregulated case could also be derived by 1ated producers (e. g., state-chartered banks). The uld hold reserves in the absence ic problem. It simply implies f regulated transactions money, Stmr, should have been pivoted inward b ount of esired without RR, S"tmr, as shown in Figure 8. Note that at Qitmr(or at any output level) imposition of a RR tax is relatively less onerous (AB < AC) and http://clevelandfed.org/research/workpaper/index.cfm Best available copy Figure 8 I I Q ' tmr tmr involves relatively less significant allocative and distributive impacts for the transactions money market. Third, the first-cut characterization of the RR tax may easily be adapted to the perfect-substitutes-with-transformation/transportation case. One would simply apply tne same analysis after filtering out the "nonpure" portions of the regulated and nonregulated transactions money supply curves (under the divisia approach, for example, one might take only a percentage of the unregulated transactions money supply curve). In the case of imperfect substitutes, however, a study of the effects of the RR tax would be more difficult. Nevertheless, one might still, after econometric estimation of simul taneou for both the regulated and unregulated transactions money markets, be able to estimate partially the consequences of a RR tax; partially only, since the RR-tax-induced increase in the price of regulated transactions money would shift both the demand for and supply of unregulated transactions money--1 imitin sector. sis of the effects of the RR tax on the unregulated http://clevelandfed.org/research/workpaper/index.cfm Best available copy - 19 - Fourth, t h e f i r s t - c u t d e p i c t i o n o f t h e RR t a x can p r o v i d e a t l e a s t a p a r t i a l e x p l a n a t i o n of why u n r e g u l a t e d t r a n s a c t i o n s money has increased so r a p i d l y i n t h e U.S. economy. If, f o r instance, t h e demand f o r money s h i f t s outward ( c e t e r i s p a r i bus) - - e it h e r because o f t h e government ( f r o m t h e d e f i c i t ) o r i n d i v i d u a l s and businesses ( f r o m s h o r t - t e r m f i n a n c i a1 s t r a i n s ) - - t h e n i t can be expected t h a t b o t h t h e burden o f t h e RR t a x on r e g u l a t e d producers w i l l r i s e and t h e supply of u n r e g u l a t e d t r a n s a c t i o n s money w i l l increase, as shown i n F i g u r e 9. With an i n c r e a s e i n t h e demand f o r t r a n s a c t i o n s money, t h e q u a n t i t y o f u n r e g u l a t e d t r a n s a c t i o n s money increases f r o m Qitmu t o Qiitmu and t h e q u a n t i t y o f r e g u l a t e d t r a n s a c t i o n s money r i s e s from Qttmr t o QNtmr. While unregulated producers b e n e f i t b y an amount equal t o area ABCT, r e g u l a t e d producers gain/lose--depending on whether area EFGH o u t w e i g h s / i s outweighed by area HIJG ( t h e burden o f t h e RR t a x r i s e s b y area HIJG w i t h t h e demand-induced i n c r e a s e i n t h e p r i c e of t r a n s a c t i o n s money). The t a x c o l l e c t o r ( i .e., the Fed) gains a d d i t i o n a l revenue equal t o area HIJG. Figure 9 Regulated S e c t o r Unregul a t e d S e c t o r T r a n s a c t i o n s Money Market http://clevelandfed.org/research/workpaper/index.cfm Best available copy Fifth, the first-cut characterization of the RR tax assumes everything else remains constant. This assumption ignores the benefits the Fed derives from relying on RR in effecting monetary policy. Specifically, through RR, the Fed is capable of: 1) directly control 1 ing the money supply; 2) preventing possible externalities attendant to bank failures resulting from insufficient reserves; and 3) minimizing the relative impact of variabi 1 i ty in excess reserves on the variability in the quantity of transactions money (and thus on the income and price levels in the economy). While changes in RR have very rarely been used for the first reason and while Cagan (1979) argues that the second reason is obviated by deposit insurance, an active federal funds market, and the Federal Reserve as a lender of last resort, the third reason does appear to be a possible justification for RR. As Cagan points out, RR make excess reserves "a smaller or more constant fraction of total reserves." It is conceivable that the benefits of RR vis-i-vis excess reserves might be measured by: 1) estimating the level of excess reserves that would prevail in a non-RR world; 2) predicting the heightened variability in total reserves that would result from the relatively higher level of excess reserves in the non-RR world; 3) estimating the increased vari abi 1 i ty in national income and prices that would result from the greater variabilty of total reserves; and 4) comparing the costs of this variability with the allocative cost (i.e., deadweight loss) of a RR tax. Finally, working from the first-cut approximation, it is also possible to speculate about the effect of attempts to make the RR tax universal--to meld the unregulated with the regulated sector in Figure 4. While more finely ecified regulations may afford greater universality, it is doubtful whether a11 of the unregulated sector may ever be transferred into the regulated sector. Furthermore, if the RR tax is a burdensome one, transactions money http://clevelandfed.org/research/workpaper/index.cfm Best available copy - 21 - producers may be expected to vote with both their physical and mental feet (they wi 1 1 devise ways of circumventing existing regulations and getting back into the unregulated sector--e.g., RPs). New firms will also be given the incentive to enter the unregulated sector--firms that may be less susceptible to the Fed (e.g., foreign banks) and that may create a product that is a much more difficult form of transactions money to monitor and control (e.g., Merri 1 1 Lynch's parking-lot money). 5. Transactions Money Price Floors Regulations of the payment of interest on various forms of transactions money are commonplace. There is, for example, a legal prohibition against banKs paying any interest on demand deposits. NOW accounts may only pay 5.25 percent. Why are such interest rate ceilings actually price floors? The reason for this apparent anomaly is rather simple. By limiting the amount of interest that producers of transactions money may pay on certain forms of transactions accounts, such regulations effectively dictate a user cost (i.e., a transactions money price) to consumers of such transactions accounts. The level of this user cost will vary positively and monotonically with the market rate of interest; i.e., the greater the interest rate, the higher will be the user cost of the regulated transactions money (other things equal and provided that tne interest-rate ceiling is effective). The user cost of transactions money likewise will vary negatively and monotonically with the level of the tally proscribed interest-rate ceiling. Assuming that both regulated and unregulated suppliers of transactions money produce a homogeneous good (and thus that consumers/demanders of http://clevelandfed.org/research/workpaper/index.cfm Best available copy - 22 transactions money cannot be differentiated along regulated market/unregulated market 1 ines), the imposition of a nonuniversal interest-rate cei 1 ing on the transactions money market may be depicted by Figure 10, where WBC represents the supply of regulated transactions money before the imposition of the interest-rate ceiling, ABC represents the supply of regulated transactions money after the imposition of the interest-rate ceiling, PKJNO is the aggregate supply of transactions money before the interest-rate ceiling regulation, MLINO is the aggregate supply of transactions money after the imposition of the interest-rate ceiling, and all other symbols are as before. Note that the supply of regulated transactions money becomes horizontal at the level of the user cost floor (this level will vary with the market rate of interest and the interest-rate cei 1 ing) . Up to quantity Q"t.ry regul ated transactions money producers would be willing to supply their product at a lower price than PItm to consumers, since the cost to the producers of supplying their product falls below the user cost to consumers (i.e., the price consumers wi 1 1 pay for the product) . Interest-rate cei 1 i ngs prevent suppliers from doing so (exceptions to this are noted below), however, and force consumers of such regulated goods onto the price floor AB. Figure 10 Regulated Sector Unregul ated Sector Transactions Money Market -- - --- -- I / i / 1 ' tmr Q*trnr/ Q1'tmr Qtmr 1 1 I Q' I Q* Qtm http://clevelandfed.org/research/workpaper/index.cfm Best available copy After imposition of the interest-rate ceiling, the aggregate supply of transactions money will be the horizontal sum of Stmu and ABC. The aggregate supply of transactions money will thus be equal to Stmu below the price of Pttm, have a horizontal segment at PItm, and be equal to the sum Of Stmu and ABC above the price of PItm. The allocative consequences of an effective interest-rate ceiling (ceteris paribus) include: 1. An increase in the price of transactions money from P*tm to PItm. 2. A decrease in the aggregate quantity of transactions money from Q* to Q'. 3. An increase in the quantity of unregulated transactions money from Q*tmu to Q'tmu* 4. A decrease in the quantity of regulated transactions money from Qktmr to Q1tmr. Note that Q1tmr = Q' - Q1tmu. The quantity Qttmr will fall somewhere to the left of Q*tmr--its exact location will be determined by the elasticity of Stmu. The more elastic Stmu, the more will the quantity of regulated transactions money decline following the imposition of an interestrate ceiling. 5. A deadweight loss for the economy as a whole--represented by area IKJ. The distributive consequences of an effective interest-rate ceiling (ceteris paribus) include: 1. A loss to consumers of transactions money equal to area P*tmP ' tmI J. 2. A gain to producers of nonregulated transactions money equal to area EFGH. 3. A gain/loss to producers of regulated transactions money--depending on whether area ARTS is greaterlsmaller than area TUV. Analogous to the RR tax, the net wealth effect of an interest-rate ceiling will be negative and will be equal in magnitude to area IJK--the deadweight loss to the economy as a whole from an interest-rate ceiling. http://clevelandfed.org/research/workpaper/index.cfm Best available copy An intermediate level approach allows several important observations and hypotheses to be made about an interest-rate ceiling. First, such a price floor toward consumers of transactions money provides another potential, if only partial, explanation for the recent increase in unregulated transactions money in the U.S. economy. The quantity of unregulated transactions money may be expected to increase with a rising price floor--caused, for example, by a rising market rate of interest. Second, if the price floor becomes high enough (if segment AB moves up sufficiently), regulated transactions money may be squeezed completely out of the market--provided that the aggregate demand for transactions money, D, intersects the aggregate supply at a quantity below the horizontal segment of the aggregate supply curve. Third, the higher the price floor for regulated transactions money, the less control the Fed will have over transactions money; the more the quantity of unregulated transactions money will increase and the more the quantity of regulated transactions money will decrease. Thus, as market rates of interest rise, one would anticipate that the Fed would have progressively less control over transactions money (ceteris pari bus). The greater the el asticity of the supply of unregulated transactions money and the smaller the elasticity of the supply of regulated transactions money (other things equal), the more quickly the Fed's control over transactions money would erode. Fourth, given that the cost of producing regulated transactions money is less than the legally proscribed price for such money (below the quantity Q "tmr ) , one would anticipate efforts on the part of regulated transactions money producers to lower the user cost (i .e., price) of their product to potential consumers. This argument might explain the payment of implicit interest on certain types of regulated transactions money--implicit interest http://clevelandfed.org/research/workpaper/index.cfm Best available copy in the form of free toasters, personalized checks. Payment of such implicit interest may be viewed as an attempt to compete away the rents (area ARTS) that regulated producers derive from interest-rate ceilings. Payment of implicit interest may also be characterized as an effort to "convexify" the horizontal segment of the supply curve ABC--in the limit, an effort to get back onto the supply curve WBC. Fifth, while the RR tax may afford the Fed the benefit of minimizing the effect of variable excess reserves, no similar potentially redeeming virtue suggests itself in the case of interest rate ceilings. If anything, transactions money price floors provide a "stableN and predictable source of income for regulated suppliers that remain in the market. This stability is eroded, however, both by the presence of unregulated producers and by the payment of implicit interest by regulated producers. The higher the market rate of interest (ceteris paribus), the greater the erosion. A stable source of income for surviving regulated suppliers is also obtained at the expense of both nonsurvivors and the Fed (the Fed's ability to control transactions money is eroded). Sixth, the regulated and unregulated sectors in the preceding analysis of transactions money price floors need not correspond to the regulated and unregulated sectors in the case of the RR tax. Finally, the Intermediate Model approach to transactions money price floors may easily incorporate a transformation/transportation cost element (see Section 11.0.2. above). B.2. The Imperfect Substitutes Model If regulated and unregulated transactions money are imperfect substitutes (and non-transformabl e/non-transportable to the perfect http://clevelandfed.org/research/workpaper/index.cfm Best available copy Figure 1 1 ' tmr substitutes case), a different analytic approach is necessary. Such an approach will perhaps more clearly portray interest-rate ceilings as transactions money price floors. Suppose, for example, that there are two separate markets--one for regulates transactions money and one for unregulated transactions money--as shown in Figure 11, where Dtmr is the demand for regulated transactions money, Dtmu is the demand for unregulated transactions money, EC is the supply of regulated transactions money prior to the imposition of an interestrate ceiling, and all other symbols are as before. Suppose that with the imposition of an interest-rate ceiling, consumers of regulated transactions money are forced to pay a price (i.e., to bear a user cost) of PItmr. Other things equal, the allocative effects of such a price floor will include: 1. A change in the effective supply curve of regulated transactions money to P1tmrABC. 2. A decrease in the quantity of regulated transactions money from Q*tmr to Qttmr. Although the value of the marginal unit of transactions money at quantity Qltmr exceeds the cost that must be http://clevelandfed.org/research/workpaper/index.cfm Best available copy incurred to produce it, the price floor of Pgtmr precludes a further expansion of regulated transactions money (since the effective user cost exceeds the price consumers are wi 1 ling to pay). 3. An excess supply of regulated transactions money at the price Pgtmr of AB = QUtmr-QgtmU. This excess supply or the fact that the cost of producing the marginal unit of transactions money exceeds the price consumers are willing to pay for that unit at Qgtmr will foster attempts on the part of regulated transactions money producers to pay implicit interest--to stretch the effective supply curve P1tmrABC toward the original supply curve EC. 4. An outward shift in the demand for unregulated transactions money due to the increase in price of a substitute good (regulated transactions money). 5. An inward shift in the supply of unregulated transactions money. 6. An increase in the price and an uncertain effect on the quantity of unregulated transactions money (due to the simultaneous shift in the supply of and demand for unregulated transactions money). 7. A deadweight loss in the regulated transactions money market equal to area AFG. While the distributive consequences of a price floor cannot be outlined for the unregulated market, they may easily be delineated for the regulated market: 1. A loss to regulated transactions money consumers equal to area P*tmrPitmrAG. 2. A gain/loss to regulated producers--depending on whether area P*tmrP'tmrAH is greater/smaller than area HGF. 3. A negative net wealth effect equal to area AFH (a deadweight loss). C. Innovations Although innovations have occurred in both the regulated and unregulated sectors of the transactions money market, the following examination will focus on innovations in the unregulated sector. This approach is adopted for three reasons. First, it appears that innovations in the transactions money market . ave occurred predominantly in the unregulated sector (e.g , money market http://clevelandfed.org/research/workpaper/index.cfm Best available copy mutual funds). Second, i n n o v a t i o n s i n t h e u n r e g u l a t e d s e c t o r pose a g r e a t e r t h r e a t t o t h e F e d ' s a b i l i t y t o m o n i t o r and c o n t r o l t r a n s a c t i o n s money. Third, f u t u r e i n n o v a t i o n s w i l l most l i k e l y o c c u r i n t h e u n r e g u l a t e d s e c t o r - - v i a t h e i n t r o d u c t i o n o f forms of money t h a t b u n d l e t o g e t h e r medium-of-exchange and store- of- value attributes. I n n o v a t i o n s a r e t a k e n t o be a f o r m of t e c h n o l o g i c a l change and a r e r e p r e s e n t e d below as outward s h i f t s of t h e s u p p l y c u r v e of u n r e g u l a t e d t r a n s a c t i o n s money. An outward s h i f t i n t h e s u p p l y of u n r e g u l a t e d t r a n s a c t i o n s money must be d i s t i n g u i s h e d from an i n c r e a s e -i n t h e quantity supplied o f unregulated t r a n s a c t i o n s money--the l a t t e r r e s u l t s from t h e i m p o s i t i o n o f e i t h e r a RR t a x o r a t r a n s a c t i o n s money p r i c e f l o o r . While t h i s d i s t i n c t i o n i s s t r a i g h t - f o r w a r d t h e o r e t i c a l l y , i t may be q u i t e d i f f i c u l t t o make e m p i r i c a l l y . I n n o v a t i o n s a r e assumed t o i n c l u d e one-bank h o l a i n g companies, advances i n communications and e l e c t r o n i c s , RPs, MMMFs, E u r o d o l l a r s , and o t h e r new forms of u n r e g u l a t e d t r a n s a c t i o n s money. Innovations, therefore, i n v o l v e both a c t u a l t e c h n o l o g i c a l changes and e n t r y b y new producers i n t o t h e u n r e g u l a t e d s e c t o r (e.g., Sears). An i n n o v a t i o n i n t h e u n r e g u l a t e d s e c t o r may be d e p i c t e d as i n F i g u r e 12, where Sttmu i s t h e s u p p l y o f u n r e g u l a t e d t r a n s a c t i o n s money f o l l o w i n g an F i g u r e 12 Regulated Sector Unregul a t e d S e c t o r T r a n s a c t i o n s Money M a r k e t http://clevelandfed.org/research/workpaper/index.cfm Best available copy innovation, S ' is the aggregate supply of transactions money following an innovation, and all other symbols are as before. The allocative effects of an innovation include: 1. A decrease in the price of transactions money from P*tm to P't,. 2. An increase in the aggregate quantity of transactions money from Q* to Q'. 3. A decrease in the quantity of regulated transactions money f ram Q*tmr to Q' tmr* 4. An increase in the quantity of unregulated transactions money from Q*tmu to Q1tmu. (The expansionary effect of the innovation must outweigh the contractionary influence of a lower price--given that the aggregate quantity increases, while the quantity of regulated transactions money declines.) 5. No deadweight loss. The distributive effects of an innovation include: 1. 2. A gain to consumers represented by area P*tmPItmGF. A loss to producers of regulated transactions money equal to area CEIH. 3. A gain/loss to producers of unregulated transactions money--depending on whether area MNLK exceeds/is exceeded by area ABKJ. Note that innovations provide another possible explanation both for the recent rapid increase in unregulated transactions money and for the simultaneous decline in the Fed's ability to monitor and control transactions money. Figure 12 also allows one to hypothesize that if an innovation is extensive enough (if the supply curve of unregulated transactions money shifts out far enough), regulated transactions money could be squeezed out of the market altogether. This might happen, for example, if an innovation allowed the bundling of money's store-of-value and medium-of-exchange attributes at minimal cost. The squeezing out of regulated transactions money, however, would occur only if the Fed had no ability to "capturen (e.g., via legislation) new forms of unregulated transactions money. http://clevelandfed.org/research/workpaper/index.cfm Best available copy IV. CONCLUSION While other aspects of the transact ions money market (e.g., subsidized check-clearing processes, deposit insurance, and capital requirements) are capable of being analyzed from a micro perspective, the preceding section has focused on the comparative statics associated with only three central aspects: reserve requirements, transactions money price floors (i nterest-rate ceilings), and innovations. The analysis highlights the fact that a micro approach may afford a better conceptual grasp of the transactions money market than a macro approach. While much more empirical and theoretical work will be required, the above-out1 i ned models are intended to generate interest in and discussion about a perspective on the transactions money market that is "less traveled by." Such a micro perspective, at least as far as regulatory decision making goes, might end up making ''all the difference." http://clevelandfed.org/research/workpaper/index.cfm Best available copy References Barnett, William A., and Paul A. Spindt. Divisia Monetary Aggregates: Compilation, Data, and Historical Behavior. Staff Studies Paper 116. Washington, D.C.: Board of Governors of the Federal Reserve System, May 1982. Cagan, Phillip. "Financial Developments and the Erosion of Monetary Controls," in William Fellner, Ed., Contemporary Economic Problems 1979. Washington, D.C.: American Enterprise Institute for Public Policy Research, 1979. Pesek, Boris P. "Monetary Theory in the Post-Robertson 'Alice in Wonderland' Era," Journal of Economic Literature, vol. 14, no. 3 (September 1976), pp. 856-84.
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