December 8, 2011 Leave a comment
According to one common view, monetary policy works by influencing household (and to a lesser extent business) preferences for investing, saving, borrowing, and spending. Bernanke’s stated justification for quantitative easing was that he could stimulate the economy by getting people to move money from their checking accounts into the stock market and from their money-market funds into car dealerships.
Risk preferences are not determined solely, or even primarily, by monetary policy. When times are good and you are confident in the future, you put more of your savings in long-duration, risky, illiquid assets like equities and housing. When times are bad, cash is king. Using data from the flow of funds, we can see how American households’ risk preferences have changed over time. The crisis has caused many people to retrench and solidify their balance sheets, yet it turns out that there could be a long way to go.