The Money View Versus the Credit View
33 Pages Posted: 29 Jun 2018 Last revised: 21 Feb 2019
Date Written: 2018-06-25
We argue that Schularick and Taylorâ€™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 â€œmoney viewâ€� and â€œcredit viewâ€� 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 Taylorâ€™s dataset. This contrasts with Schularick and Taylorâ€™s (2012) highly negative verdict on the money view. In accounting for the difference in findings, we first explain that Schularick and Taylorâ€™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 viewâ€™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 Taylorâ€™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, Money view, Recessions, Financial crises
JEL Classification: E32, E51
Suggested Citation: Suggested Citation