Barnett, William A. and Chauvet, Marcelle (2008): The End of the Great Moderation: “We told you so.”.
Download (3MB) | Preview
The current financial crisis followed the “great moderation,” according to which the world’s central banks had gotten so good at countercyclical policy that the business cycle no longer existed. As more and more economists and media people became convinced that the risk of recessions had moderated or ended, lenders and investors became willing to increase their leverage and risk-taking activities. Mortgage lenders, insurance companies, investment banking firms, and home buyers increasingly engaged in activities that would have been considered unreasonably risky, prior to the great moderation that was viewed as having lowered systemic risk. It is the position of this paper that the great moderation did not reflect improved monetary policy, and the perceptions that systemic risk had decreased and that the business cycle had ended were false. Contributing to those misperception was low quality data provided by central banks.
Since monetary assets began yielding interest, the simple sum monetary aggregates have had no foundations in economic theory and have sequentially produced one source of misunderstanding after another. The bad data produced by simple sum aggregation have contaminated research in monetary economics, have resulted in needless “paradoxes,” have produced decades of misunderstandings in economic research and policy, and contributed to the widely held views about decreased systemic risk. While better data, based correctly on index number theory and aggregation theory, now exist, the usual official central bank data are not based on that better approach. While aggregation-theoretic monetary aggregates exist for internal use at the European Central Bank, the Bank of Japan, and many other central banks throughout the world, the only central banks that currently make aggregation-theoretic monetary aggregates available to the public are the Bank of England and the St. Louis Federal Reserve Bank. Dual to the aggregation-theoretic monetary aggregates are the aggregation-theoretic user cost and interest rate aggregates, which similarly are not in official use by central banks. No other area of economics has been so seriously damaged by data unrelated to valid index-number and aggregation theory.
Many commentators have been quick to blame insolvent financial firms for their “greed” and their presumed self-destructive, reckless risk taking. Perhaps some of those commentators should look more carefully at their own role in propagating the misperceptions of the great moderation that induced those firms to be willing to take such risks.
|Item Type:||MPRA Paper|
|Original Title:||The End of the Great Moderation: “We told you so.”|
|Keywords:||Measurement error; monetary aggregation; Divisia index; aggregation; monetary policy; index number theory; financial crisis; great moderation; Federal Reserve|
|Subjects:||C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C43 - Index Numbers and Aggregation
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E40 - General
|Depositing User:||William A. Barnett|
|Date Deposited:||19. Nov 2008 06:53|
|Last Modified:||08. Jan 2014 03:02|
Barnett, William A., 1978. "The User Cost of Money." Economics Letter 1 145-149. Reprinted in William A. Barnett and Apostolos Serletis (eds.), 2000, The Theory of Monetary Aggregation, North Holland, Amsterdam, chapter 1, pp. 6-10.
Barnett, William A., 1980. "Economic Monetary Aggregates: An Application of Aggregation and Index Number Theory," Journal of Econometrics 14, 11-48. Reprinted in William A. Barnett and Apostolos Serletis (eds.), 2000, The Theory of Monetary Aggregation, North Holland, Amsterdam, chapter 1, pp. 6-10.
Barnett, William A., 1982. "The Optimal level of Monetary Aggregation," Journal of Money, Credit, and Banking 14, 687-710. Reprinted in William A. Barnett and Apostolos Serletis (eds.), 2000, The Theory of Monetary Aggregation, North Holland, Amsterdam, chapter 7, pp. 125-149.
Barnett, William A., 1983. "Understanding the New Divisia Monetary Aggregate," Review of Public Data Use 11, 349-355. Reprinted in William A. Barnett and Apostolos Serletis (eds.), 2000, The Theory of Monetary Aggregation, North Holland, Amsterdam, chapter 4, pp. 100-108.
Barnett, William A., 1984. “Recent Monetary Policy and the Divisia Monetary Aggregates,” American Statistician 38, 162-172. Reprinted in William A. Barnett and Apostolos Serletis (eds.), 2000, The Theory of Monetary Aggregation, North Holland, Amsterdam, chapter 23, pp. 563-576.
Barnett, William A., 1987, “The Microeconomic Theory of Monetary Aggregation, in William A. Barnett and Kenneth Singleton (eds.), New Approaches to Monetary Economics, Cambridge U. Press. Reprinted in William A. Barnett and Apostolos Serletis (eds.), 2000, The Theory of Monetary Aggregation, North Holland, Amsterdam, chapter 3, pp. 49-99.
Barnett, William A., 1997. “Which Road Leads to Stable Money Demand?”, The Economic Journal 107, 1171-1185. Reprinted in William A. Barnett and Apostolos Serletis (eds.), 2000, The Theory of Monetary Aggregation, North Holland, Amsterdam, chapter 24, pp. 577-592.
Barnett, W. A., 2000. “A reply to Julio J. Rotemberg.” In: Belongia, M.T. (ed) Monetary policy on the 75th anniversary of the federal reserve system. Boston: Kluwer Academic, 232-244 (1991). Reprinted in: Barnett, W. A., Serletis, A. (eds.) The theory of monetary aggregation. Amsterdam: North Holland.
Barnett, William A., 2007, “Multilateral Aggregation-Theoretic Monetary Aggregation over Heterogeneous Countries,” Journal of Econometrics, vol 136, no 2, February, pp. 457-482.
Barnett, W. A. and A. Serletis (eds), 2000, The Theory of Monetary Aggregation, Contributions to Economic Analysis Monograph Series, Elsevier, Amsterdam.
Barnett, William A. and Wu, Shu. 2005. “On user costs of risky monetary assets.” Annals of Finance 1, 35-50.
Barnett, William A. and Ge Zhou. 1994. “Partition of M2+ as a Joint Product: Commentary,” Federal Reserve Bank of St. Louis Review, 76, pp. 53-62.
Barnett, William A., Unja Chae, and John Keating. 2006. “The Discounted Economic Stock of Money with VAR Forecasting,” Annals of Finance, vol 2, no 2, July, pp. 229-258.
Barnett, William A, Marcelle Chauvet, and Heather L. R. Tierney, 2008, “Measurement Error in Monetary Aggregates: A Markov Switching Factor Approach,” Macroeconomic Dynamics, forthcoming.
Barnett, William A. and Marcelle Chauvet, 2009, "International Financial Aggregation and Index Number Theory: A Chronological Half-Century Empirical Overview," Open Economies Review, forthcoming.
Barnett, W., Fisher, D. and Serletis, A. 1992. Consumer theory and the demand for money. Journal of Economic Literature 30, 2086–119. Reprinted in Barnett and Serletis (2000, ch. 18).
Barnett, William A., Edward K. Offenbacher, and Paul A. Spindt, 1984. "The New Divisia Monetary Aggregates," Journal of Political Economy 92, 1049-1085. Reprinted in William A. Barnett and Apostolos Serletis (eds.), 2000, The Theory of Monetary Aggregation, North Holland, Amsterdam, chapter 17, pp. 360-388.
Batchelor, Roy, 1989. “A Monetary Services Index for the UK,” Mimeo, Department of Economics, City University, London.
Belongia, M., 1996, “Measurement Matters: Recent Results from Monetary Economics Reexamined,” Journal of Political Economy, v. 104, No. 5, 1065-1083.
Belongia, M. and Alec Chrystal, 1991. “An Admissible Monetary Aggregate for the United Kingdom,” Review of Economics and Statistics 73, 497-503.
Belongia, M. and P. Ireland, 2006, “The Own-Price of Money and the Channels of Monetary Transmission,” Journal of Money Credit and Banking, 38, No. 2, 429-445.
Chauvet, M., 1998, “An Econometric Characterization of Business Cycle Dynamics with Factor Structure and Regime Switches,” International Economic Review, Vol. 39, No. 4, November, 969-96.
Chauvet, M., 2001, “A Monthly Indicator of Brazilian GDP,” in Brazilian Review of Econometrics Vol. 21, No. 1. Chrystal, A. and MacDonald, R. 1994. Empirical evidence on the recent behaviour and usefulness of simple-sum and weighted measures of the money stock. Federal Reserve Bank of St. Louis Review 76, 73–109.
Cockerline, Jon and John Murray, 1981. “A Comparison of Alternative Methods fo Monetary Aggregation: Some Preliminary Evidence,” Technical Report #28, Bank of Canada.
Diewert, W. 1976. Exact and superlative index numbers. Journal of Econometrics 4, 115–45.
Drake, Leigh, 1992. “The Substitutability of Financial Assets in the U. K. and the Implication for Monetary Aggregation,” Manchester School of Economics and Social Studies 60, 221-248.
Fase, Martin, 1985. “Monetary Control: The Dutch Experience: Some Reflections on the Liquidity Ratio.” In Monetary Conditions for Economic Recovery, C. van Ewijk and J. J. Klant (eds.), Dordrecht: Martinus Nijhoff, 95-125.
Fisher, Irving. 1922, The Making of Index Numbers: A Study of their Varieties, Tests, and Reliability, Boston: Houghton Mifflin.
Goldfeld, Stephen M., 1973. “The Demand for Money Revisited.” Brookings Papers on Economic Activity 3, 577-638.
Hicks, J. R., 1946, Value and Capital, Oxford: Clarendon Press.
Hoa, Tran Van, 1985. “A Divisia System Approach to Modelling Monetary Aggregates,” Economics Letters 17, 365-368.
Ishida, Kazuhiko, 1984. “Divisia Monetary Aggregates and the Demand for Money: A Japanese Case,” Bank of Japan Monetary and Economic Studies 2, 49-80.
Kim, C.J. and C. Nelson, 1998, “State-Space Models with Regime-Switching: Classical and Gibbs-Sampling Approaches with Applications,” The MIT Press.
Lucas, Robert E., 1987, Models of Business Cycles. New York: Basil Blackwell.
Lucas, Robert E., 2003, “Macroeconomic Priorities,” American Economic Review, vol 93, no 1, pp. 1-14.
Lucas, Robert E., 2000, “Inflation and Welfare,” Econometrica, vol 68, no. 62, March, pp. 247-274.
Schunk, D., 2001, “The Relative Forecasting Performance of the Divisia and Simple Sum Monetary Aggregates,” Journal of Money, Credit and Banking, 33, No. 2, 272-283.
Swamy, P.A.V.B. and Peter Tinsley, 1980, “Linear Prediction and Estimation Methods for Regression Models with Stationary Stochastic Coefficients.” Journal of Econometrics 12, 103-42.
Yue, P. and R. Fluri, 1991. “Divisia Monetary Services Indexes for Switzerland: Are They Useful for Monetary Targeting?,” Federal Reserve Bank of St. Louis Review 73, 19-33.
Available Versions of this Item
- The End of the Great Moderation: “We told you so.”. (deposited 19. Nov 2008 06:53) [Currently Displayed]