RDP 8301: Financial Innovations and Monetary Policy, A Preliminary Survey Section I

In attempting to explain the causes of innovation, not much advance has been made on Minsky who wrote that “changes in financial institutions and money-market usages are the result of either legislation or evolution” (Minsky, 1957, p. 171). The recent experience with high rates of inflation and interest (nominal and real), which has produced both a comprehension of the opportunity cost of holding transactions balances and an expectation that these high costs would continue, the growing sophistication of savers' demands and attitudes and the technological advances made in microcomputers and information transportation are all factors helping to explain financial innovations.^[2] Briefly, financial institutions can be viewed as profit maximisers within constraints set by official regulation, available technology and the prevailing demands for services. In consequence, innovations will be forthcoming when either an external constraint is altered, or the cost of compliance (not innovating) becomes too great, or a profitable new service area lures.

Footnote

For an interesting systematisation of these forces for change see Kane (1981). On the conflict between financial micro efficiency and macro stability see Mayer (1982). [2]