risk in the economy, which may lead to excessive, and eventually unsustainable, growth in bank lending. the procyclical leverage of banks is associated with other features of the financial economy and its dynamics. for example, the leverage of financial intermediaries influences the pricing of assets : once again, this feature can impart procyclicality to asset pricing. when risk measures are low during a growth and boom phase of the cycle, asset prices tend to be supported, but during the contractionary phase, asset prices can drop, with risk premia rising, which, in turn, can lead to further contractions in credit by lenders, resulting in a negative feedback loop that can amplify the initial shock to asset prices. finally, the procyclical leverage of financial intermediaries is tied to systemic risk, suggesting that the leverage of financial intermediaries is a key factor behind economy - wide financial crises. once again, a potential “ macroprudential ” regulator – one that is attempting to reduce the risk of a financial crisis but also attempting to stabilize the macroeconomy – would face a risk - return tradeoff : allowing a buildup in financial intermediary leverage as the economy grows can assist in achieving macroeconomic objectives such as full employment, but risks a more severe downturn if such leverage growth becomes excessive. making those judgments is inherently difficult. the benefit of being a money issuer society demands money for many purposes. money provides a good way for people to store value safely, and it can be used as a means of exchange. these are classic and enduring features of money. for the purpose of this talk, by “ money ” i mean a broad definition of money – what some would call “ money - like ” assets that can provide the monetary functions of storing value and serving as a medium of exchange. those include both short - term government debt and short - term borrowing by financial intermediaries, especially borrowing that is designed to be extremely safe, such as repurchase agreements, or repos. a repo is a fairly modern instrument that i ’ ll describe in a bit more detail, as repos played an important role in the buildup of intermediary leverage and the issuance of private - sector money - like instruments during the lead - up to the crisis of 2007 – 09. a repo is a sale of a security with an agreement to buy it back on a later date ( the most common

- to - ten - year horizon ( bottom panel ), a rather counterintuitive result. what should we make of the volatility of breakeven inflation over recent years? one interpretation is that inflation expectations are not as well anchored as policymakers would like ( see bernanke, 2004, for additional evidence on this point ). the fact that inflation compensation tends to react strongly both to releases of macroeconomic data and to unexpected changes in monetary policy ( gurkaynak, sack, and swanson, 2003 ) supports this interpretation. still, at this point i think we need to be cautious about drawing strong conclusions about the short - run behavior of expected inflation from the data on breakeven inflation. the fact that the volatility of breakeven inflation is so much greater than that of standard survey measures of inflation expectations ( such as those collected by the federal reserve bank of philadelphia for professional forecasters or by the university of michigan for consumers ) should give us pause. the responsiveness of breakeven inflation to what might be construed primarily as liquidity disturbances, such as the russian debt crisis and recent bouts of mortgage hedging activity that roiled treasury markets, suggests that variable liquidity premiums, together with varying inflation risk premiums, contaminate breakeven inflation as a measure of expected inflation. 6 i have emphasized some reasons to be cautious in interpreting breakeven inflation as expected inflation. nevertheless, i expect that the usefulness of inflation - indexed securities as a tool for measuring expected inflation will increase over time. the liquidity of tips should continue to improve as the share of government debt issued in inflation - linked form continues to rise, particularly if the treasury decides to expand the range of maturities of indexed bonds that it offers. moreover, as i will discuss briefly later in the talk, our ability to model risk and liquidity premiums is improving, which will help us control for an important source of volatility in breakeven inflation. finally, the universe of inflation - linked financial assets seems to be increasing, which will allow for fruitful comparisons and cross - checking. for example, futures on the cpi were recently introduced on the chicago mercantile exchange. although these contracts are not yet widely traded, they may at some point provide useful measures of breakeven inflation out to the maturity of the shortest - term tips, thereby filling in an important portion of the term structure of breakeven inflation. interest rates and spreads