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June 07, 2012 at 09:53 AM EDT
Dudley on interest income channel
From a friend: At the conference on Friday, NY Fed President Dudley presented a chart that showed the long-term impact on the budget deficit of lower Fed remittances of interest income over time (his point was that it would lead to a larger deficit and the Treasury should not assume recent levels of Fed remittances). [...]

From a friend:

At the conference on Friday, NY Fed President Dudley presented a chart that showed the long-term impact on the budget deficit of lower Fed remittances of interest income over time (his point was that it would lead to a larger deficit and the Treasury should not assume recent levels of Fed remittances).

I asked him in Q&A if he considered that in the short-term, the interest being accrued by the govt sector would typically be accrued by the non-govt sector and it could thus be viewed as a form of fiscal drag, and that maybe it should be offset by looser fiscal policy elsewhere if the economy warranted it due to a large output gap.

His response, not surprisingly, was:
‘You are factually correct, but’:

  • A lot of that interest income goes to non-u.s. investors, so its not like the U.S. economy loses all that interest income.
  • The propensity to consume of savers is lower than that of borrowers.
  • The drain on interest income is more than offset by easier financial conditions elsewhere (via equities, credit spreads, etc).

That’s just how their models work/they see the world.

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