MONETARY-POLICY INDICATORS AFTER DEREGULATION

This paper investigates the role of the monetary aggregates after dere gulation as well as an alternative credit view of the monetary transmi ssion mechanism. The credit view, based on the assumptions that not al l financial assets are perfect substitutes and not all agents are iden tical, suggests that the spread between the commercial paper and Treas ury bill rates may serve as an indicator of monetary policy. Other int erest rate spreads which might be useful are a term-structure spread a nd a private-public risk spread. Johansen's multivariate tests for coi ntegration are used to determine whether a set of variables including the federal funds rate, an indicator variable, a monetary aggregate, o utput and the price level are linked in a single cointegration relatio nship. Empirical results strongly support the hypothesis of cointegrat ion when M1 is included as an intermediate target. The commercial pape r-Treasury bill and term structure spreads serve as monetary policy in dicators, but the private-public risk spread responds to changes in ou tput rather than serving as an indicator.