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Testing Wicksellianism

In: Profiting from Monetary Policy

Author

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  • Thomas Aubrey

Abstract

In 2011 the IMF published a study looking at the drivers behind the asset allocation decisions of long-term investors in an attempt to ascertain the risks that sudden changes in asset allocation have on global financial stability. The analysis concluded that investor decisions were largely driven by positive growth prospects as indicated by real GDP growth forecasts.2 This implies that when forecasts suddenly reverse, as they did during the financial crisis, it can lead to dramatic capital flows out of bond and equity funds into cash or liquid credit-worthy government bonds such as US Treasuries. Such rapid movements can of course exacerbate the stability of the economy and increase the volatility of asset prices. The challenge in the lead up to the financial crisis was that most investors’ real GDP forecasts were wrong. The reality is that any attempt to forecast the future is fraught with complexity and more than likely to be misleading.

Suggested Citation

  • Thomas Aubrey, 2013. "Testing Wicksellianism," Palgrave Macmillan Books, in: Profiting from Monetary Policy, chapter 0, pages 113-155, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-28970-4_7
    DOI: 10.1057/9781137289704_7
    as

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