money helps to illustrate the point i am trying to make. it remains to be seen how popular this form of payment will become in the united states, but the question of whether nonbank institutions should be allowed to issue electronic money is actively being debated in many countries. some argue that issuing money is a special bank function and that electronic money should properly remain exclusively a bank product. for the time being, however, i along with other policymakers at the federal reserve have concluded that any decision to reserve the nascent market for smart cards and other forms of electronic money as a province for banks alone might well stifle both competition and technological innovation in this area. thus, while most would agree that providing efficient payment media for small dollar transactions is a “ special ” function that banks currently perform, it does not follow that only banks should be allowed to perform the function. as a corollary, i would also say that there is not a “ special ” public purpose in constraining banks from competing in many other markets traditionally dominated by nonbank financial institutions. this is a subject which is especially topical in the united states because our domestic banks are more restricted in the business activities in which they can engage than are banks in many other countries. as you know, the federal reserve has pushed to expand banks ’ ability to compete with investment houses in underwriting securities, and the scope for u. s. banks to sell insurance - related products has also expanded recently. the third general aspect of banking that is often deemed special is the linkage between the banking system and monetary policy. of course, this is a topic that has spawned a truly vast economic literature. without venturing into this thicket, i would simply like to note as fact that through much of the 1990 - 1994 period, growth of the broad u. s. monetary aggregates such as m2 was quite at odds with historical relationships to nominal income growth. 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. this “ decoupling ” of banking system deposit liabilities and nominal gdp became so pronounced during the first half of the 1990s that the federal open market committee downgraded the status of m2 as a policy variable. 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

they can make more informed spending and financial decisions. if policymakers can reduce uncertainty about the course of monetary policy, the economy is likely to perform more efficiently. of course, in order to communicate something about the reaction function, you have to have one. that means in order to succeed with this approach to forward guidance, policymakers must be able to agree on how they will systematically respond to changes in economic conditions. to be useful, however, the reaction function need not be mechanistic. qualitative information about such a function and how it will be implemented can also be useful and meaningful. nevertheless, some degree of commitment to abide by the specified reaction function is necessary if the communication is to achieve the desired result of reducing policy uncertainty and providing meaningful forward guidance. a somewhat different rationale or view of forward guidance is that it is a way of increasing accommodation when the policy rate is at or near the zero lower bound. some models suggest that when you are at the zero lower bound, it can be desirable, or optimal, to indicate that future policy rates will be kept “ lower for longer ” than might otherwise be the case. thus, policymakers may want to deliberately commit to deviating from what they would otherwise choose to do under normal conditions, such as following a taylor - like rule. in these models, such a commitment would tend to raise inflation expectations and lower long - term nominal rates, thereby inducing households and businesses to spend more today. this approach asks more of forward guidance than just articulating a reaction function. it takes more credibility and commitment because it requires policymakers to directly influence and manage the public ’ s beliefs about the future policy path that differs from how policymakers behaved in the past. as i have indicated in previous speeches, this approach to forward guidance can backfire if the policy is misunderstood. 1 for example, if the public hears that the policy rate will be lower for longer, it may interpret this news as policymakers saying that they expect the economy to be weaker for longer. if that is the interpretation of the message, then the forward guidance will not succeed and may even weaken current spending. the fomc has not been clear about the purpose of its forward guidance. is it purely a transparency device, or is it a way to commit to a more accommodative future policy stance see charles i. plosser, “ forward guidance, ” speech to the stanford institute for economic policy research ’ s ( siepr ) associates