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The reason for the shift seems to have been an

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Unformatted text preview: shown in Figure 5 with the quantities in Figure 1—indicates that an outward shift of the supply of intermediation schedule XS was responsible, rather than a movement ment along this schedule in response to a loosening of monetary policy. The reason for the shift seems to have been an increased appetite of investors for purportedly low-risk short-term liabilities of very highly leveraged financial intermediaries; in this journal, Brunnermeier (2009) details the changes in financing patterns during this this period. The The effects of such a shift were like those shown in Figure 4, but with the reverse sign; as a consequence, the Fed’s increase in the funds rate over the period between 2004 and 2006 did less to restrain demand than would ordinarily have been expected. expected.14 The increase in the riskless short-term rate did reduce households’ and firms’ willingness to hold demand deposits, as a conventional money-demand equarms’ tion tion would imply, and checkable deposits declined during this period, as shown in Figure 1B;...
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