Bubbles and Broad Monetary Aggregates: Toward a Consensus Approach to Business Cycles
22 Pages Posted: 10 Jun 2015 Last revised: 14 Feb 2020
Date Written: July 17, 2018
A challenge for quantity-theoretic explanations of business cycles is that recessions manifest despite central banks’ scrupulousness to avoid falls in monetary aggregates, a fact which would seem to indicate a structural explanation. This paper argues that a broader and theoretically richer Divisia aggregate – which reflects changes in financial market liquidity even without changes in the quantity of any particular asset – can reconcile these two approaches. Liquidity shocks such as the rise and collapse of asset bubbles can drive excess supply of and demand for money, respectively, that quantity theorists point to as determinative of short-run economic fluctuations.
Keywords: Business cycles, Asset bubbles, Money, Recession, Credit, Divisia
JEL Classification: E32, G1, E51, E44
Suggested Citation: Suggested Citation