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How Better Monetary Statistics Could Have Signaled the Financial Crisis

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  • William A. Barnett

    (Department of Economics, The University of Kansas)

  • Marcelle Chauvet

    (University of California at Riverside)

Abstract

This paper explores the disconnect of Federal Reserve data from index number theory. A consequence could have been the decreased systemic-risk misperceptions that contributed to excess risk taking prior to the housing bust. We find that most recessions in the past 50 years were preceded by more contractionary monetary policy than indicated by simple-sum monetary data. Divisia monetary aggregate growth rates were generally lower than simple-sum aggregate growth rates in the period preceding the Great Moderation, and higher since the mid 1980s. Monetary policy was more contractionary than likely intended before the 2001 recession and more expansionary than likely intended during the subsequent recovery.

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Bibliographic Info

Paper provided by University of Kansas, Department of Economics in its series WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS with number 201005.

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Length: 54 pages
Date of creation: Aug 2010
Date of revision: Aug 2010
Handle: RePEc:kan:wpaper:201005

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Keywords: Measurement error; monetary aggregation; Divisia index; aggregation; monetary policy; index number theory; financial crisis; great moderation; Federal Reserve.;

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