The Money View Versus the Credit View

By Sarah S. Baker, D. López-Salido, Edward Nelson. Finance and Economics Discussion Series, 2018

1,735 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/e54b86341024f4e5714e8299f46fea4a62e3b95f

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Citations in the corpus

Macroprudential Policy, Countercyclical Bank Capital Buffers, and Credit Supply: Evidence from the Spanish Dynamic Provisioning Experiments (2017, neutral): “I. INTRODUCTION Banking crises are recurrent phenomena that generally come after periods of strong credit growth (Kindleberger (1978), Gourinchas and Obstfeld (2012), Schularick and Taylor (2012)).”
What Happened: Financial Factors in the Great Recession (2018, background): “8 As emphasized by Adrian, Colla, and Shin (2012) and Becker and Ivashina (2014), the deterioration in the financial health of commercial banks induced many nonfinancial borrowers to switch from bank to public debt markets to obtain credit, placing upward pressure on the excess bond premium.”
Learning from History: Volatility and Financial Crises (2016, methodology): “While there is no established cut-off value in the literature to classify an indicator as strong, Schularick and Taylor (2012) find an AUROC of 72% for the predictive ability of credit booms on a banking crisis.”
Disentangling the Effects of a Banking Crisis: Evidence from German Firms and Counties (2018, background): “A number of more recent empirical studies document that banking crises have been correlated with deep and persistent recessions (Cerra and Saxena 2008; Reinhart and Rogoff 2009; Schularick and Taylor 2012; Giesecke et al. 2014; Krishnamurthy and Muir 2017).”
Global Debt Database: Methodology and Sources (2018, background): “During this period money and credit, although volatile, moved in tandem and have a stable relationship with GDP (for more details, see Schularick and Taylor (2012).”
The Impact of Geopolitical Risks on Financial Development: Evidence from Emerging Markets (2020, background): “…early 1990s, with the significant growth of domestic credit seen as early-warning indicator of internal- and global financial crises (Davis et al., 2016; joc2020-1-v3.indd 93 23.3.2020 8:35:10 Journal of Competitiveness 94 Gourinchas & Obstfeld, 2012; Jordá et al., 2011; Schularick & Taylor, 2012).”