Welcome to “Where is the General Theory of the 21st Century”, an interview series that explore the evolution of the post-Great Recession Macroeconomics.
We are honored to have Jeremy Stein, the Moise Y. Safra Professor of Economics at Harvard University and former member of the Board of Governors of the Federal Reserve, to explain his recent research “The Federal Reserve’s Balance Sheet as a Financial-Stability Tool” (coauthored with Robin Greenwood and Samuel Hanson).
This paper put forth the most widely-accepted argument for the Fed to maintain a sizeable balance sheet going forward. As Prof. Stein explains below, financial market stability could be at risk if too much of the supply of safe assets is from private sector providers. They argue that the financial system would be safer if the government can provide more short-term safe securities to satisfy investors’ demand and crowd-out private sector issuances.
Why do they think it the Fed who issues more reserves for investors? Why can’t Treasury take up the responsibility? More importantly, does it actually mean that the Fed’s balance sheet has to be “sizeable” forever? Prof. Stein will tell us more about all these in the interview below.
Q: EconReporter S: Jeremy Stein
| The transcript is edited for clarity. All mistakes are ours. |
Under your proposal, do you think there is any need for reforming and improving the RRP? For example, should the Fed open it to more participants? If so, to whom should the Fed open the RRP?
S: I think I agree with the premise of your question. If the ultimate goal is to create something that looks like T-bills and created by the Fed, you want it to be widely available.
One restriction I might make is to open it only to government-only money funds. That’s a quite simple way to make it available to everybody. The money fund is sort of “mile reaper” on this. The RRP goes into a money fund, the money fund may charges investors 10-20 basis points, and then anybody can invest in the money fund.
One way to think about it is what fraction of the interest that the Fed pays on the RRP get ultimately pass through to households.The problem with reserves is that it has to be intermediated by the banking sector. So there is a big wedge between what the banks get from the Fed, and what the bank’s depositors get from the banks. With something like a money fund structure where you get a reasonable degree of competition, it would mostly get passed through. The interest that the Fed pays goes to the Mum and Pop at the end of the day.
So my vision is that I don’t think you need to change it dramatically. Just try to encourage as much competition from money fund-like vehicles as possible, and that would get us most the way there.