Abstract
The provision of financial services has steadily undergone a process of change driven by innovation. Still, close observers of the marketplace agree that financial innovation accelerated greatly in the 1980s in three essential areas: (1) markets, (2) products and services, and (3) the technology to produce them. In discussing the causes of this burst of innovation, we will see that it was propelled by essentially macroeconomic forces, all having to do with the increased volatility of exchange rates, the acceleration of inflation, and the current account imbalance that appeared in the 1970s. These forces shifted in pattern and were sustained throughout the 1980s. The nature and degree of change in the last decade has transformed the functioning of the financial structure so greatly that a number of fundamental public policy issues, such as the functioning of monetary policy and construction of safety nets, now need to be rethought. Because this process is of great importance to central bankers, it is useful to consider its concrete manifestations. This paper will discuss these manifestations first in the area of capital market instruments, then in the area of derivative instruments, and finally in the effect of technology on market players. My conclusion will consider regulation and market discipline.
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