"If money isn't loosened up, this sucker could go down" - George W. Bush warned in September 2008

Monday, March 15, 2010

NY Fed vs. Scott Sumner

Brian P. Sack (NY Fed):
"Some have discussed whether the draining of excess reserves has effects on the economy beyond the implications for short-term interest rates. In my view, it would be surprising if there were significant effects on the real economy or inflation associated with substituting one short-term, liquid, risk-free asset (reverse repos or term deposits with the Fed) for another (reserves), except for the degree to which that substitution affects the Fed’s control of overnight interest rates."

Scott Sumner:
"The Fed should stop paying interest on excess reserves, and if necessary should put a small interest penalty on excess reserves. This would encourage banks to stop sitting on all the money that has been injected into the system."

I think NY Fed is right here. I have debated this with Scott Sumner in this extra long comment thread.

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