mimic the runlike incentives associated with short - term debt financing, and one or more of these mechanisms may well be present in fixed - income funds. second, i also agree that there is no general separation principle for monetary policy and financial stability. monetary policy is fundamentally in the business of altering risk premiums such as term premiums and credit spreads. so monetary policymakers cannot wash their hands of what happens when these spreads revert sharply. if these abrupt reversions also turn out to have nontrivial economic consequences, then they are clearly of potential relevance to policymakers. my one qualification is as follows : in the absence of a general separation principle, when one might consider addressing financial stability issues either with regulation or with monetary policy, it becomes all the more critical to get the case - by - case analysis right – that is, to really dig into the microeconomic details of the presumed market failure and to ask when a regulatory intervention is comparatively more efficient than a monetary one, or vice versa. so while i think it is important to remain heterodox and to be open to taking either approach, i would not want to rule out the possibility that some of the risks identified by the authors could be mitigated, at least in part, via a regulatory approach. i look forward to seeing more work that helps us sort through these challenging issues. references chen, joseph, harrison hong, and jeremy c. stein ( 2001 ). “ forecasting crashes : trading volume, past returns, and conditional skewness in stock prices ( pdf ), ” journal of financial economics, vol. 61, pp. 345 – 81 chevalier and ellison ( 1999 ) is a classic reference. indeed, the results in the paper closely parallel those in chen, goldstein, and jiang ( 2010 ), who find that fund flows forecast future returns more strongly among those equity funds that hold relatively illiquid stocks ( for example, small - cap stocks ). moreover, chen, goldstein, and jiang cast their regressions as being an explicit test of the strategic - complementarity hypothesis. bis central bankers ’ speeches chen, qi, itay goldstein, and wei jiang ( 2010 ). “ payoff complementarities and financial fragility : & evidence from mutual fund outflows, ” journal of financial economics, vol. 97 ( 2 ), pp. 239 – 62. chevalier, judith, and glenn ellison ( 1999 ). “ career concerns of mutual fund managers ”, quarterly journal of

have stale prices – that is, not to have been recently marked to market. and, second, if most of a fund ’ s assets are illiquid securities, its manager will be inclined to accommodate early exits by drawing down on the fund ’ s cash reserve while planning to sell securities and replenish the cash stock later. why, at the end of the day, should one care if run - like incentives come predominantly from the strategic behavior of fund investors, as opposed to that of fund managers? isn ’ t there the same worrisome fragility in either case? perhaps, but the policy response may differ depending on the exact diagnosis. in the former case, when the primary worry is aum runs on the part of investors, there is at least in principle a natural regulatory fix : one could impose exit fees on open - end funds that are related to the illiquidity of the funds ’ assets, in an effort to make departing investors more fully internalize the costs that they impose on those who stay behind. in the latter case, when the problem is driven more by the portfolio choices of fund managers, it is harder for me to see an obvious regulatory response, so i am more inclined to share the authors ’ view that if there is, indeed, a significant financial stability problem, monetary policy would be left to take up some of the slack. to be clear, i am not advocating for exit fees of the sort i just described ; i do not think we know enough about the empirical relevance of the aum - run mechanism, to say nothing of its quantitative importance, to be making such recommendations at this point. but, given the detailed nature of the micro data that are available on individual fund holdings and returns, there is clearly room to make significant further progress on this front. indeed, recent work by chen, goldstein, and jiang is very much in this spirit, although it restricts its analysis to equity funds and doesn ’ t consider the fixed - income categories that are the focus of the current paper. 6 with this framing in mind, let me comment briefly on the empirical work in the paper. there is a lot of it, and i will just touch on a couple of points. a first observation is that the heavy focus on flows in and out of funds is a bit at odds with the theoretical model. as i mentioned earlier, the model, taken literally, is one of closed - end funds with fixed aum. if one were interested in