Sunday, February 10, 2013

Is Ben Bernanke a real business cycle theorist?

I was thinking about Bernanke's argument about intermediation in the depression - this is really an argument about a real productivity shock to the banking sector. It's essentially a real business cycle theory, just in a particularly special industry - an RBC with big network effects? I'm not sure why I never thought of that before - I think "non-monetary effects" is even in the title of the paper.

Anyway, file this under "don't get caught up in labels".


  1. You nailed it. A shock in the credit sector can lead to contraction of the real economy. Bernanke is trying to prevent a problem much like the one that happened in 31 as banks collapsed.

  2. Bernanke differentiates between supply- and demand-side shocks to credit intermediation. He prefers the demand-side explanation. I admit that I have a little trouble understanding it, but he describes it as being a result of a widening divergence between the costs of borrowing and the "safe rate" on savings. If the former is higher than the latter for households and small businesses (the most likely to borrow through the loanable funds market), then the demand for "current-period goods" will contract (pp. 267–268).


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