Monday, September 10, 2012

Everything You Wanted To Know About IOER

In one epic post by Cardiff Garcia of FT Alphaville. 

Update: Let me clarify one point from Garcia's post.  He mentions my argument that the lowering of the IOER would send a signal that the Fed is committed to a permanent expansion of the monetary base.  This should not be construed to mean that lowering the IOER would create more monetary base, since that is not the case.  Rather, my argument is that it would send a signal that  some of the existing increase in the monetary base would become permanent.  Currently, long-run inflation forecasts suggest that most observers do not expect the large increase in the monetary base to be permanent. 

1 comment:

  1. If there is more "money" in the MV product, then velocity will just adjust.

    Increasing the interest rate will rapidly reduce the velocity, so if there is "too much" monetary base, that M increase can be offset by a V decrease.

    But is Net Worth part of the M?
    Not in most models -- which is why most models failed in the 2000-2012 time frame.

    For most homeowners, how much "money" they have, with respect to their decision making, includes how much equity they have in their house. Less equity, less money.

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