Economic Models - Convex Optimization

202 Athanasios Athanasenas
2. The Credit Issue Researched: A Brief Note
on the US Economy
There is an evidence that money tends to “lead” income in a historical sense
(see Friedman and Schwartz (1963) and Friedman (1961; 1964). Where the
mainstream monetarists through the “quantity theory” explain the empirical
observations as the causal relationship running from money to income.
Since the seminal works of Sims, empirical validation of the relationship
between money and income fluctuations has been established (Sims, 1972;
1980a). Since the publication of the works of Goldsmith (1969), Mckinnon
(1973), and Shaw (1973), the debate has been going on about the role of
financial intermediaries and bank credit in promoting the long-run growth.
On the basis of historical data, Friedman and Schwartz (1963) argue that
major depressions of the US economy have been caused by autonomous
movements in money stock. 1 Sims (1980a) concludes that on one hand,
money stock emerges as causally prior accounting for a substantial fraction
of income variance during the inter-war and post-war periods of the business
cycles. On the other hand, old skepticism remains on the direction of
causality between money and income.
It is well known that traditional monetarists are consistent with the
old-classic view that only “money matters”, so that even when tightening
of bank credits does occur during recessions, they see these as part
of the endogenous financial system, rather than exogenous events, which
induce recessions. As Brunner and Meltzer (1988) argue, banking crises
are endogenous financial forces, which directly affect business cycles conditional
upon the monetary propagation mechanism. 2
In contrast, the “new-credit” viewers stress further the importance of
credit restrictions, while accepting the fundamental inefficiencies of the
monetary policy. 3 Bernanke and Blinder (1988), in their seminal article,
conclude that credit demand is becoming relatively more stable than money
1 Ibid.
2 Note that monetarists seem to stress mainly, the complementarity of credit and money
channels of transmission, the short-run stability of the money multiplier, and the long-run
neutrality of money.
3 The “new-credit” view combines the “old-credit” view of the money to spend perspective,
with the money to hold perspective of the money view. The “old-credit” view focused on
decisions to create and spend money, on the expansion effects of bank lending, and emphasized
the issue of the non-neutrality of credit money in the long-run (see also, Trautwein,
2000).