MONETARY-POLICY INDICATORS AFTER DEREGULATION

This paper investigates the role of the monetary aggregates after deregulation as well as an alternative credit view of the monetary transmission mechanism. The credit view, based on the assumptions that not all financial assets are perfect substitutes and not all agents are identical, suggests that the spread between the commercial paper and Treasury bill rates may serve as an indicator of monetary policy. Other interest rate spreads which might be useful are a term-structure spread and a private-public risk spread. Johansen's multivariate tests for cointegration are used to determine whether a set of variables including the federal funds rate, an indicator variable, a monetary aggregate, output and the price level are linked in a single cointegration relationship. Empirical results strongly support the hypothesis of cointegration when M1 is included as an intermediate target. The commercial paper-Treasury bill and term structure spreads serve as monetary policy indicators, but the private-public risk spread responds to changes in output rather than serving as an indicator.