The Money View Versus the Credit View

López-Salido, J David, Sarah Baker and Edward Nelson

No 12982, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: Money view; Credit view; Recessions; Financial crises (search for similar items in EconPapers)
JEL-codes: E32 E51 (search for similar items in EconPapers)
Date: 2018-06
New Economics Papers: this item is included in nep-fdg, nep-knm and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://cepr.org/publications/DP12982 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: The Money View Versus the Credit View (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:12982

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP12982

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().