The Money View Versus the Credit View

35 Pages Posted: 11 Jun 2018

See all articles by David Lopez-Salido

David Lopez-Salido

Board of Governors of the Federal Reserve System

Sarah S. Baker

Board of Governors of the Federal Reserve System

Edward Nelson

Board of Governors of the Federal Reserve System

Date Written: June 2018

Abstract

We argue that Schularick and Taylor's (2012) comparison of credit growth and monetary growth as financial-crisis predictors does not necessarily provide a valid basis for achieving one of their stated intentions: evaluating the relative merits of the "money view" and "credit view" as accounts of macroeconomic outcomes. Our own analysis of the postwar evidence suggests that money outperforms credit in predicting economic downturns in the 14 countries in Schularick and Taylor's dataset. This contrasts with Schularick and Taylor's (2012) highly negative verdict on the money view. In accounting for the difference in findings, we first explain that Schularick and Taylor's characterization of the money view is defective, both because their criterion for its validity (that rapid monetary growth predicts financial crises) is misplaced, and because they incorrectly take the money view's proponents as relying on the notion that monetary aggregates are a good proxy for credit aggregates. In fact, the money view of Friedman and Schwartz does not predict an automatic relationship between rapid monetary growth and (financial or economic) downturns, nor does it rest on money being a good proxy for credit. We further show that Schularick and Taylor's data on money have systematic faults. For our reexamination of the evidence, we have constructed new, and more reliable, annual data on money for the countries studied by Schularick and Taylor.

Keywords: credit view, Financial crises, money view, Recessions

JEL Classification: E32, E51

Suggested Citation

Lopez-Salido, David and Baker, Sarah S. and Nelson, Edward, The Money View Versus the Credit View (June 2018). CEPR Discussion Paper No. DP12982. Available at SSRN: https://ssrn.com/abstract=3193985

David Lopez-Salido

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Sarah S. Baker (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Edward Nelson

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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