Bubbles and Broad Money Aggregates: A New Light on Business Cycles

22 Pages Posted: 10 Jun 2015 Last revised: 18 Jul 2018

Cameron Harwick

The College at Brockport SUNY

Date Written: July 17, 2018

Abstract

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

Harwick, Cameron, Bubbles and Broad Money Aggregates: A New Light on Business Cycles (July 17, 2018). GMU Working Paper in Economics No. 15-63. Available at SSRN: https://ssrn.com/abstract=2616057 or http://dx.doi.org/10.2139/ssrn.2616057

Cameron Harwick (Contact Author)

The College at Brockport SUNY ( email )

Brockport, NY 14420
United States

HOME PAGE: http://https://cameronharwick.com

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