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Vol. 72, No. 4
Posted 1990-07-01

The Effects of Financial Innovations on Checkable Deposits, M1 and M2

by John A. Tatom

John A. Tatom examines this financial innovations hypothesis. As Tatom explains, the hypothesis implies that the growth of these new checkable deposits should have reduced the turnover of total checkable deposits and boosted the demand both for checkable deposits relative to currency holdings, and for M1. The growth in money market balances should not have affected the composition or demand for M1 and M2. Tatom finds that these innovations did not have the statistically significant effects predicted by the financial innovations hypothesis. In particular, new interest-bearing checkable deposits had no effect on the turnover rate of total checkable deposits, the demand for total checkable deposits relative to currency, or the demand for M1. Also to the contrary, Tatom finds that M1 and M2 demand were both affected by the introduction of money market balances. Tatom concludes that analysts of financial innovation effects generally have focused on the wrong innovation and the wrong monetary aggregate. His results indicate that the principal influence of financial innovations has been the substantial effect of money market balances on the demand for M2.

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