tag:blogger.com,1999:blog-582368152716771238.post501798335511692610..comments2024-03-29T05:46:24.412-05:00Comments on The Grumpy Economist: Stein on Financial Stability in Monetary Policy John H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-582368152716771238.post-77900983749061334032014-03-25T22:06:32.376-05:002014-03-25T22:06:32.376-05:00I understand that, due to sticky prices and wages,...I understand that, due to sticky prices and wages, money can be non-neutral in the short run, i.e., if money demand exceeds money supply then prices/wages can't fall enough to bring money demand into equilibrium with money supply, resulting in unemployment. Why would we also expect monetary policy to affect risk premiums?<br /><br />Also, it seems somewhat paradoxical to me that deliberately undercorrective monetary policy, i.e., deliberately leaving money supply and demand in disequilibrium, would lead to less variance in unemployment. What would cause the economy to be more stable in disequilibrium than in equilibrium?<br /><br />I see where Stein posits a "financial market vulnerability (FMV)" variable that raises the conditional variance of unemployment in response to monetary loosening. What is his argument that such a variable with these properties exists, other than by assumption? Is he saying that positive shifts in money supply will cause increased variance of velocity of money (money demand) and, presumably, vice-versa for negative money supply shifts? If shifting money supply induces variance in money demand, why would it be asymmetric in that direction? I guess I get confused by discussions of monetary policy that don't make explicit reference to money supply and demand.BCnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-26161425965176568442014-03-25T20:50:31.732-05:002014-03-25T20:50:31.732-05:00" How, if at all, does monetary policy influe..." How, if at all, does monetary policy influence the evolution of the ratio? Without an answer to this question, it is hard to say how much one would want to alter the stance of policy when, say, the ratio is abnormally high relative to trend."<br /><br />Leverage is another word for debt. The structure of monetary policy influences the ratio if money is created as debt by the commercial banks. If the fed directly passes money onto the public when conducting policy on a non debt basis then leverage declines. dannyb2bhttp://cmamonetary.orgnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-79201896410525936832014-03-25T13:42:08.296-05:002014-03-25T13:42:08.296-05:00"How, if at all, does monetary policy influen..."How, if at all, does monetary policy influence the evolution of the [leverage] ratio?"<br /><br />It seems axiomatic that loose monetary policy would lead to increased leverage across a wide range of assets classes and that tighter monetary policy would see a reduction in leverage - that after all is how monetary policy is supposed to work.<br /><br />Talk of raising short term rates is premature while the Fed is still pumping massive amounts of money into QE and intends to continue to do so for the next six to eighteen months. The combined effects of QE, Abenomics and lax lending in China seem pretty clear: China has a housing bubble and America and Japan have significant financial market bubbles. Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-12091990551011586302014-03-25T05:12:40.178-05:002014-03-25T05:12:40.178-05:00In his first paragraph, Stein says we should toler...In his first paragraph, Stein says we should tolerate relatively high unemployment so as to stop Wall Street bringing the economy crashing down! If that’s not a damning indictment of the existing banking system, what is?<br /><br />I’ve got a better idea: implement the banking system advocated by John Cochrane, Milton Friedman, Lawrence Kotlikoff, Irving Fisher and several other authoritative individuals. That’s the system set out in the article by John, and which he referred to in his post just below: “A world without banks”. See:<br /><br />http://faculty.chicagobooth.edu/john.cochrane/research/papers/Stopping%20Bank%20Crises%20Before%20They%20Start%20-%20WSJ.pdf<br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.com