Bubbles and Broad Money Aggregates: A New Light on Business Cycles
22 Pages Posted: 10 Jun 2015 Last revised: 18 Jul 2018
Date Written: July 17, 2018
A major challenge for quantity theoretic explanations of business cycles that recessions can manifest despite central banks’ scrupulousness in avoiding falls in monetary aggregates, a fact which would seem to require a more structural “credit cycle” explanation. This paper argues that a broader and theoretically richer monetary aggregate than the conventional simple-sum aggregates can render these two approaches equivalent. Specifically, a weighted aggregate of media of exchange – the theoretically proper “quantity of money” – will reflect changes in financial market liquidity, even without any change in the quantity of any particular asset. Liquidity shocks such as the rise and collapse of asset bubbles can drive the 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, Capital, Depression, Recession, Credit
JEL Classification: E32, G1, E51, E44
Suggested Citation: Suggested Citation