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

Abstract

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

Harwick, Cameron, Bubbles and Broad Monetary Aggregates: Toward a Consensus Approach to Business Cycles (July 17, 2018). Eastern Economic Journal, 45(2): 250–68., Available at SSRN: https://ssrn.com/abstract=2616057 or http://dx.doi.org/10.2139/ssrn.2616057

Cameron Harwick (Contact Author)

SUNY College at Brockport ( email )

Brockport, NY 14420
United States

HOME PAGE: http://cameronharwick.com

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