Monday, September 24, 2007

When a short-term loan really is short term 

I can't add to James Hamilton's explanation. I said it before, but the professor provides the evidence that the bump in liquidity really was short-term. The take-away:
This is not to insist that concerns about higher inflation are unfounded. But, if one wanted to motivate such concerns from a monetarist perspective, one could not point to money that has been printed so far. Instead, the story would have to be that, in order to achieve the path for the fed funds rate that the Fed is now likely to set for the following year, the Fed will eventually need to add more reserves that do end up as more cash in circulation. In this scenario, markets have been reacting to an anticipation of future money creation and not to something that has already happened.