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Bubbles and Broad Monetary Aggregates: Toward a Consensus Approach to Business Cycles

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  • Cameron Harwick

    (The College at Brockport)

Abstract

A challenge for quantity-theoretic explanations of business cycles is that recessions manifest despite central banks’ scrupulousness to avoid falls in monetary aggregates, a fact which would seem to indicate a structural explanation. This paper argues that a broader and theoretically richer Divisia aggregate—which reflects changes in financial market liquidity even without changes in the quantity of any particular asset—can reconcile these two approaches. Liquidity shocks such as the rise and collapse of asset bubbles can drive excess supply of and demand for money, respectively, that quantity theorists point to as determinative of short-run economic fluctuations.

Suggested Citation

  • Cameron Harwick, 2019. "Bubbles and Broad Monetary Aggregates: Toward a Consensus Approach to Business Cycles," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 45(2), pages 250-268, April.
    • Handle: RePEc:pal:easeco:v:45:y:2019:i:2:d:10.1057_s41302-018-00127-y
    DOI: 10.1057/s41302-018-00127-y
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    More about this item

    Keywords

    Business cycles; Divisia; Monetary policy; Quantity theory; Asset bubbles;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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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