Brief Outline of Topics Covered in Lecture 3
Chapter 11 The Economics of Financial Intermediation
Function of Financial Intermediaries
- Funding investment
- Reducing transactions and information costs
- Examples of pooling risk, pooling small deposits, and pooling over time
- Adverse selection
- Moral hazard
Video:
Additional Reading:
- Currency wars: Lessons from the US experience - Vox EU
- Why the Obama Administration Invested in Solyndra - James Surowiecki
- "Industrial Complexes" and the Great Relocation - Noahpinion
- How does Operation Twist differ from QE? - Matt Rognlie
- Economics in the Next Ten Years? - Economic Principals
- The Renminbi and US Manufacturing - Paul Krugman
- Monetary policy and democracy - Econbrowser
- The Yen And The Low-Inflation Trap - Paul Krugman
Application:
Fed’s Bullard: Worried About Drop in Inflation Expectations, by Jon Hilsenrath, WSJ: Recent declines in inflation expectations, as measured in government bond markets, are worrisome, James Bullard, president of the Federal Reserve Bank of St. Louis said in an interview with The Wall Street Journal.
Expected inflation over the next five years has fallen to less than 1.5% based on measures in the market for Treasury Inflation Protected Securities, or TIPS. That is down from nearly 2.5% in April.
“That is making me a little bit worried,” Mr. Bullard said, because it could be a sign that inflation could drop well below the Fed’s informal 2% objective and that there is a greater risk of deflation, or falling consumer prices. If economic activity continued to weaken or if the economy were to be hit by another shock, then inflation expectations could decline substantially below the Fed’s objectives, he said.
The Fed last year pointed to the risk of deflation as a reason to launch a bond-buying program known as quantitative easing. Mr. Bullard said that while the market now is suggesting a growing risk of deflation, he does not see deflation as likely, but rather something to keep an eye on. The bar to another round of quantitative easing was still high “at this point,” he said. ...
Fed Chairman Ben Bernanke also said Wednesday the Fed is watching price trends very closely given the decline in market-based measures of inflation expectations. ... The chairman had been asked about the moves in the TIPS market. He said that in surveys, respondents expect that price increases will average around 2% over the coming years, which is where the central bank wants them. ...
