To: Ian@SI who wrote (140939 ) 8/29/1999 8:36:00 PM From: Lee Read Replies (5) | Respond to
Hi Ian,..Re:.calm, rational, sober thought is in order, bog.frb.fed.us As the value of assets and liabilities have risen relative to income , we have been confronted with the potential for our economies to exhibit larger and perhaps more abrupt responses to changes in factors affecting the balance sheets of households and businesses. In general, if the trend of expensed items that should be capitalized is rising faster than reported earnings, switching to capitalizing these items will almost always accelerate the growth in earnings. undervalued ?More broadly, there is an increasing need to integrate into our macro models more complete descriptions of the responses of households and businesses to risk --behaviors that are generally modeled separately under the rubric of portfolio risk management. But while time preference may appear to be relatively stable over history, perceptions of risk and uncertainty, which couple with time preference to create discount factors, obviously vary widely, as does liquidity preference, itself a function of uncertainty. The impact of increasing uncertainty and risk aversion was no more evident than in the crisis that gripped financial markets last autumn, following the Russian default There are important--but extremely difficult--questions surrounding the behavior of asset prices and the implications of this behavior for the decisions of households and businesses. Accordingly, we have little choice but to confront the challenges posed by these questions if we are to understand better the effect of changes in balance sheets on the economy and, hence, indirectly, on monetary policy .
