Econintersect: Do you agree that “financial market disruptions can arise without any leverage or actions taken by leveraged intermediaries”? The authors of a study found that there are mutually amplifying impacts of price changes and flows – and there are connections between the destabilizing flows and shocks to monetary policy.
Federal Reserve Governor Jeremy Stein summarized this study in part:
….. the authors argue that policymakers should pay careful attention not just to measures of leverage in the banking and shadow banking sectors, but also to the financial stability risks that might arise from the behavior of unlevered asset managers, such as those running various types of bond funds. Notably, assets under management in fixed-income funds have grown dramatically in the years since the onset of the financial crisis, even while various measures of financial-sector leverage have either continued to decline or remained subdued.
First, the study Market Tantrums and Monetary Policy from Michael Feroli, Anil K Kashyap, Kermit Schoenholtz, and Hyun Song Shin which was presented at the 2014 U.S. Monetary Policy Forum in New York city on February 28, 2014 – followed by Fed Governor Jeremy Stein’s comments on this study.