Perhaps the most important factor underlying this development has been a fundamental realignment of household financial assets away from bank deposits in favor of bond and stock mutual funds and other capital market investments. Today M2 remains only one of the many variables reviewed by the FOMC in the course of its policy deliberations. I raise this example because financial innovations and shifts in financial structure affecting the monetary aggregates in other countries have similarly created complications in their implementation of monetary policy. Indeed, the difficulties in guiding monetary policy during periods of rapid financial innovation have been a factor contributing to greater experimentation among central banks with alternative targets such as inflation or nominal GDP growth. Ironically, while the growth of bank deposits may be less special as a policy guide, the special role of the banking sector as the primary vehicle in implementing monetary policy in most countries remains unchallenged.
Most central banks seek to achieve their objectives through some form of interest rate management.
Control over short-term interest rates is achieved in every case I am aware of by manipulating the supply of central bank reserves available to satisfy banks' demand for reserves. Banks' demand for reserves is similarly influenced by central banks either directly by setting reserve requirements or indirectly by allowing only banks to access the payment system and then setting the rules regarding the management of their central bank accounts. As I hope my previous comments make clear, regulatory and supervisory policies must recognize the dynamic forces at play in the financial sector. Such policies must promote and exploit the competitive process in order to foster efficient delivery of services while encouraging financial and economic stability. These objectives are not likely to be achieved by regulations that arbitrarily identify and rigidly segment bank and nonbank financial markets.