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The Money View Versus the Credit View

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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.

Suggested Citation

  • Sarah S. Baker & J. David López-Salido & Edward Nelson, 2018. "The Money View Versus the Credit View," Finance and Economics Discussion Series 2018-042, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2018-42
    DOI: 10.17016/FEDS.2018.042
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    Cited by:

    1. Daniel Kaufmann, 2020. "Is deflation costly after all? The perils of erroneous historical classifications," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(5), pages 614-628, August.
    2. Robert S. Kravchuk, 2020. "Post‐Keynesian Public Budgeting & Finance: Assessing Contributions From Modern Monetary Theory," Public Budgeting & Finance, Wiley Blackwell, vol. 40(3), pages 95-123, September.
    3. Luca Benati, 2018. "Money and Credit: A Long-Term View," Diskussionsschriften dp1811, Universitaet Bern, Departement Volkswirtschaft.
    4. Bluwstein, Kristina & Buckmann, Marcus & Joseph, Andreas & Kapadia, Sujit & Şimşek, Özgür, 2023. "Credit growth, the yield curve and financial crisis prediction: Evidence from a machine learning approach," Journal of International Economics, Elsevier, vol. 145(C).
    5. James W. Douglas & Ringa Raudla, 2020. "Who is Afraid of the Big Bad Debt? A Modern Money Theory Perspective on Federal Deficits and Debt," Public Budgeting & Finance, Wiley Blackwell, vol. 40(3), pages 6-25, September.
    6. Emmanuel Carré & Laurent Le Maux, 2024. "Bernanke and Kindleberger on financial crises, 1978–2003," Oxford Economic Papers, Oxford University Press, vol. 76(2), pages 314-329.
    7. D. Masciandaro, 2019. "What Bird Is That? Central Banking And Monetary Policy In The Last Forty Years," BAFFI CAREFIN Working Papers 19127, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

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    More about this item

    Keywords

    Credit view; Money view; Recessions; Financial crises;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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