The visible hand in economics

Money supply, leading indicators, and recessions

Posted on: July 16, 2008

Not PC has a very interesting post on identifying recessions. Using a special measure of the money supply as a leading indicator he shows that a large fall in this measure usually implies a recession (*).

This makes sense as a recession is a time when money demand falls rapidly. As the stock of money is determined by an exogenously set price and a money demand curve we would expect “money supply” in this stock sense to fall rapidly.

I disagree with his articles conclusion in the current monetary policy context (“the expansion and contraction of the money supply is the single greatest factor in causing booms and busts“) – but I do think that the method he points out is extremely clever. It is also a welcome reminder that monetary aggregates still give us some information – even if the information is all mixed up by definitional errors and technological change 🙂

4 Responses to "Money supply, leading indicators, and recessions"

[…] Moneysupply, leading indicators, and recessions […]

Any of you guys seen “The Money Masters” documentary? It’s not so academic, but is pretty entertaining.

[…] Moneysupply, leading indicators, and recessions […]

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