tag:blogger.com,1999:blog-2499715909956774229.post3635655266389403608..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: Plosser: Central Bank Commitment and Interest on ReservesStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-2499715909956774229.post-24241658811970241322010-09-29T07:23:42.050-07:002010-09-29T07:23:42.050-07:00Parag,
Yes, that's important. I think the ten...Parag,<br /><br />Yes, that's important. I think the tendency for central banks to focus on "core" inflation is nonsense. The idea seems to be that price movements that come from volatile components of the CPI are likely to be temporary and should be ignored. One problem is that today's volatile component may be different from yesterday's volatile component: you have to keep changing your definition of what the core is. Another is that there can be permanent price changes in volatile components that you should be paying attention to. It's best to stick to a broad and accurate measure of the price level. I like the implicit GDP price deflator, but of course that's only available at quarterly frequencies, which is a disadvantage.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-87609684885044574292010-09-28T23:13:38.825-07:002010-09-28T23:13:38.825-07:00Plosser also called for more emphasis on total inf...Plosser also called for more emphasis on total inflation. He said the argument for looking at "core" inflation is "less compelling" now as other price components are more volatile than energy and food, and a focus on core inflation will not boost public confidence either. <br /><a href="http://www.financemetrics.com/save-the-banks-from-themselves/" rel="nofollow">Banks and financial crisis</a>Paraghttps://www.blogger.com/profile/06252372041858393646noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-70566183527288342752010-09-27T13:54:56.828-07:002010-09-27T13:54:56.828-07:00"doesn't the banking system face a perfec..."doesn't the banking system face a perfectly elastic supply of reserves under a normal Fed Funds targeting regime?"<br /><br />Roughly, yes. The mechanics of intervention in the US (in normal times) appear to be that the open market desk in New York makes a prediction every day about the quantity of reserves they need to supply, mainly through repos, to achieve the fed funds target rate. They supply that quantity and then the fed funds rate is what it is (the Fed never quite gets it right) and essentially no excess reserves are held overnight.<br /><br />With an IOR floor (what the Fed is up to right now), the Fed sets the IOR, and then targets some quantity of reserves in the system such that the quantity of excess reserves held overnight will be greater than zero. If there were no risk associated with lending on the fed funds market and arbitrage were perfect, then the fed funds rate would be equal to the IOR. Banks have to be indifferent between lending on the fed funds market and holding the reserves overnight. In practice, there is some slippage as Fannie Mae and Freddie Mac are not paid interest on reserves, the arbitrage is imperfect, and fed funds lending is risky. Currently the effective fed funds rate is less than the IOR.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-15558498818273539762010-09-27T07:08:21.442-07:002010-09-27T07:08:21.442-07:00A similar question to one I asked previously: does...A similar question to one I asked previously: doesn't the banking system face a perfectly elastic supply of reserves under a normal Fed Funds targeting regime? What is the difference between that and an IOR floor, either from a fiscal or monetary standpoint? I must be missing something here.Anonymousnoreply@blogger.com