Saturday, November 15, 2008
On the "Floor System"
Now that the Fed is paying interest on deposits, and doing so at the Fed funds target rate, much of what I tell students about how monetary policy works is out the window. This Macroblog post on "the changing operational face of monetary policy" by David Altig looks like a good place to start when I re-write my lecture notes.
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3 comments:
Bill,
I believe such an important (and confusing) topic deserves a bigger mention in your blog. I think the link you posted does a good job of explaining what's going on but doesn't explain why it helps.
I guess it should help bring the FFR closer to the targeted rate but as of today, it isn't really working. There is also the other big question of why banks are not taking advantage of this situation (borrow at 0.35% and lend at 1.0%).
I also wonder if there is any piece out there explaining what kind of feedback are the Fed officials getting from the markets. Clearly, some Fed official must have asked the banks the following question: "why are you guys not borrowing and lending, what else do you want?"
Thanks, Esen. I agree. I've never had much reason to think much about these institutional details, so its been difficult - but fun - to try to figure out what's going on, even as everything changes very rapidly. I'm hopefully going to spend some more time on it over break as I get ready to teach intermediate macro next semester... if you have any suggestions, let me know.
Interesting story as for me. It would be great to read something more concerning this matter. Thnx for posting that information.
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