PORTFOLIO SUBSTITUTABILITY, REGULATIONS, AND MONETARY POLICY.

The article examines the importance of substitutability among assets for the efficacy of monetary policy in the U.S. The impact of monetary policy on the real sector is crucially dependent upon the degree of substitutability between all kinds of assets in the public's portfolio. The channels through which monetary policy influence gross national product can be divided into two major groups, the monetary view and the credit view. In both the credit and monetary views of the monetary process. From the monetary view, an open market operation is also more potent if money and bonds are not very good substitutes. Specifically, if they were very good substitutes for each other, then the public would have less inducement to alter its spending habits due to open market operations. Proponents of the monetary view seem to argue that in the latter substitute sense, money and bonds might be good substitutes for each other and still be consistent with effective monetary policy. The importance of substitutability for the interest-sensitivity-of-investment view is quite obvious once it is realized that interest rates on private debt instruments are the crucial links between policy and spending decisions. Open market operations affect U.S. government bond rates directly. Rates on private securities are affected to the extent that U.S. government debt and private debt are substitutes for each other.