Monday, January 18, 2016

Possible slower adjustment for monetary base

Later this week, we'll get the new bi-weekly monetary base data to compare with the prediction, but the source base (that the seasonally adjusted bi-weekly number closely tracks) has gone back up [source]:


  1. Jason, wouldn't raising the IOER to tighten policy necessarily increase the money base all else equal? That is, we are no longer increasing rates by draining reserves, but rather by increasing the rate we pay on reserves.

    1. I am not sure, at least in regard to traditional macro -- it is true higher IOER does increase the incentive to keep excess reserves (all else equal). But is it a big effect? What is the opportunity cost of holding reserves now that the effective fed funds rate is higher?

      However in the ITM, IOER doesn't play an explicit role. Maybe it is wrong, but that's what this prediction is for ... :)

    2. Say the evidence indicates that IOR (it's paid regardless of its "excess" status I think) should play a role. Can you imagine a way to incorporate it into the ITM without too much disruption?

    3. Ah... I see you said "explicit role" ... so perhaps it plays an implicit role somehow... (I seem to recall having this conversation once before, but I don't recall how it turned out).

    4. Tom -- IOR may explain the difference between M0 and MB, which is just taken as an empirical fact in the ITM. (But then it may not.)

    5. Regarding the op. cost: wouldn't this just be the spread between the ioer and the ff (or the OWN rate)? Since the ioer is the upper bound on the target range, the op. cost will always be high (FF<IOER) and the IOER is currently higher than the OWN rate.

      In addition to the incentive to increase deposits at the fed (hold more reserves) there is a base money growing effect because you are earning a higher rate on the existing balance. So even if you don't get an increase in new deposits, the balance (and thus base money) will necessarily grow no?

      thanks for the response.


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