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MMMFs and more post-conference wrap-up

The money market mutual fund (MMMF) data featured in my last post may need some explanation and in fact I ended the post with the statement, “More later.” I gathered the data in connection with work on this financial instrument that I did for a presentation at the Eastern Economic Association meeting last weekend. The session in which I gave this presentation was put together and submitted efficiently and helpfully to the conference organizers by the Association for Evolutionary Economics, a professional association for Institutionalist economists. The Institutionalist paradigm once dominated the US economics profession but now exists outside of the neoclassical “mainstream,” which has its own methods and paradigm for analyzing the role of institutions.

My post contained a figure showing amounts of money held in money market mutual fund accounts owned by nonfinancial entities in the US, along with some series on other assets that are comparable or similar to MMMFs. Why MMMFs? They continue to be a key type of financial institution providing funds to the largely unregulated shadow banking sector. On the other hand, from the perspective of sectors that invest in their shares, MMMFs are also a form of money that is included in broad official measures of the quantity of money, including M3. As Hyman P. Minsky emphasized, the financial cycle of boom and bust brought with it waves of financial innovation and a gradual increase in leverage throughout the private sector. Monetary instruments that were liabilities of the private sector were not closely followed closely by economists who were predisposed by their theoretical priors to assume that that central bank moneys were the main drivers of future inflation and cyclical output changes. In contrast, Minsky argued beginning in the 1940s and 1950s that private-sector credit and finance were far more crucial as forces driving the cyclical fluctuations in GDP, inflation, and unemployment, along with the possibility for another big crash. In his theory, the public sector and the central bank mostly were given credit for playing a partially successful defense that kept the whole process going.

The data in the figure do evince some connection between MMMFs and financial and economic fluctuations, with MMMFs fading as a percentage of GDP after the crisis. Some series trend upward, consistent with the rising size of the financial sector as a part of the economy–a phenomenon known as “financialization.” The Securities and Exchange Commission has had MMMFs on its agenda for some time, with a regulatory overhaul expected. MMMFs came up during the height of the financial crisis in 2009, as the market for very-short-run funds became unstable.

Coauthor Tai Young-Taft of Simon’s Rock and I also presented two papers elaborating models of monetary and financial phenomena. Finally, I did a paper of my own on a topic in econometrics–the application of statistic methods to economic data. We hope to have versions of our papers to be available on the worldwide web soon. I am hoping that this site can host some files related to these and other papers presented at the conference soon.

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