Kocherlakota embraces a market monetarist argument

Just yesterday David Beckworth published a post where he states:

One of the big challenges facing the global economy is the shortage of safe assets. These are the highly liquid, information-insensitive assets that function as money. The financial crisis raised the demand for these safe assets just as many of them were disappearing. This cyclically-driven safe asset shortage (or excess money demand) that emerged continues to this day and is why aggregate demand in many countries remains depressed.

The only problem with my story is that it seemed it would never get tested. But that was before Abenomics. Though it doesn’t target NGDP, Abenomics does create a radical departure from past economic policy in Japan. Among other things, it has committed the Bank of Japan to open-ended asset purchases until inflation hits 2% and the monetary base doubles. This has provided a significant jolt to expectations, a big regime change that should catalyze the demand for and supply of privately-created safe assets if my story has merit.

And in a speech today Kocherlakota makes the same argument:

Since the Great Recession, workers and businesses are seeking safer assets, even as the supply of assets perceived as safe dwindles, Minneapolis Fed President Narayana Kocherlakota told a group convened by the University of Chicago Booth School of Business.

“The increase in asset demand, combined with the fall in asset supply, implies that households and firms spend less at any level of the real interest rate-that is, the interest rate net of anticipated inflation,” he said in prepared remarks.

The Fed has kept short-term interest rates near zero since December 2008, and has bought well over $2 trillion in Treasuries and housing-backed bonds to bring down long-term interest rates and stimulate spending and hiring.

Still, Kocherlakota said, “The (Fed) has still not lowered the real interest rate sufficiently in light of the changes in asset demand and asset supply that I’ve described.”

He only has to make one correction. Instead of proposing rates remain low until unemployment comes down to 5.5%, a full percentage point below the Fed´s threshold, he should canvas the Fed for a regime change and target NGDP.

That´s not outside the realm of possibility if one remembers that less than three years ago Kocherlakota was saying that unemployment was structural and that to avoid deflation (and become the ‘new Japan’) the Fed should RAISE the Fed Funds rate!

HT Patricia Stefani

7 thoughts on “Kocherlakota embraces a market monetarist argument

  1. Junk bonds are selling like it’s 2007, the stock market is making new highs, and we’re supposed to believe there’s a safe asset shortage? How can such an obviously wrong analysis become so popular?

  2. Safe assets. I guess the bond market could produce bonds that had plenty of collateral, cash flow etc relative to bond payments. There should be demand for that.

    But junk bond are rallying. Equities rallying.

    Maybe QE is working, should be tried more….

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