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HindustanTimes Thu,21 Aug 2014

Bernanke may take monetary cue from NRI prof’s radical idea

Pramit Pal Chaudhuri, Hindustan Times  New Delhi, September 05, 2013
First Published: 19:45 IST(5/9/2013) | Last Updated: 19:49 IST(5/9/2013)

Ben Bernanke’s next monetary steps may take a cue from a paper presented by a Chennai-born Arvind Krishnamurthy. Krishnamurthy has triggered a major debate on US monetary policy by arguing Bernanke, the US Federal Reserve chairman, would be better of switch the direction of his soft money policy from buying US Treasury bonds to buying mortgage-backed securities.

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Krishnamurthy was the lead author of a paper presented last Friday at the Jackson Hole conference, an annual powwow hosted by the US central bank. Investment advisor Ed Yaterini described the paper as “the talk of the town”. Goldman Sachs’s US economist, Kris Dawsey, told Business Insider his eyes were on Krishnamurthy’s presentation.

The possibility Krishnamurthy’s radical idea might catch the attention of global finance’s most powerful man is enhanced by the fact Bernanke’s speech at Jackson Hole last year had footnoted an earlier, similar Krishnamurthy paper. “I have no idea if the work will have any influence.  People from the Fed were interested in the results,” he emailed HT.

The Kellogg School of Business professor argues the Federal Reserve’s mass purchases of Treasury bonds may have helped put money into the economy, but the bank could be more helpful to the average US business if after reducing its Treasury bonds purchases to zero, it switched to selling the same bonds and buying mortgage-backed securities. Because mortgage rates are closely tied to the mortgage-backed security yield and the strength of the housing market is so intrinsic to the health of the entire US economy, Krishnamurthy argues, Bernanke would get more bang for his buck by investing in such securities. This will not provide much comfort to India which has seen the rupee plummet on expectations Bernanke will roll back his soft money policy, thus reducing the volume of dollars available in the global market. This concern is at the top of the agenda Prime Minister Manmohan Singh has taken to the ongoing G-20 summit.

Krishnamurthy believes the US will tighten its monetary policy sooner than expected. “If one looks at the federal funds futures contract, which is a market indicator of how quickly the Fed will raise the federal funds rate, the increase in the rate is apparent,” he says. “I do not think that the mortgage backed security-versus-Treasury bond emphasis that we suggest per se will change much for India.” The benefits for India would arise from an overall US economic recovery. 

Read: Krishnamurthy’s own chart on the federal fund

Krishnamurthy, who studied at the Besant Arundale school in Chennai, moved with his parents to the US when he was a teenager.


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