EconPapers    
Economics at your fingertips  
 

The End of the Great Moderation: “We told you so.”

William Barnett and Marcelle Chauvet

MPRA Paper from University Library of Munich, Germany

Abstract: 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.

Keywords: Measurement error; monetary aggregation; Divisia index; aggregation; monetary policy; index number theory; financial crisis; great moderation; Federal Reserve (search for similar items in EconPapers)
JEL-codes: C43 E32 E40 E52 E58 (search for similar items in EconPapers)
Date: 2008-11-14
New Economics Papers: this item is included in nep-cba, nep-hpe, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/11642/1/MPRA_paper_11642.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/11817/2/MPRA_paper_11817.pdf revised version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:11642

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter (winter@lmu.de).

 
Page updated 2025-03-22
Handle: RePEc:pra:mprapa:11642