Gold, France and book recommendations

Can you recommend a book that you haven’t read yet? I am not sure, but I will do it anyway. I believe we can learn a lot from the Great Depression and I am especially preoccupied with the international monetary consequences and causes of the Great Depression.

An issue that especially have come to my attention is the hoarding of gold by central bank prior and during the Great Depression and here especially France’s hoarding of gold is interesting and have already blogged about Douglas Irwin’s excellent paper “Did France Cause the Great Depression?”

However, both Scott Sumner and Douglas Irwin have recommend to me that I should read H. Clark Johnson’s book “Gold, France and the Great Depression”. I don’t want to disappoint Scott and Doug – after all they are both big heroes of mine so I better start reading, but I haven’t been able to find the time yet – especially since taking up blogging. Between the day-job and an active family life reading is something I do at very odd hours. That said, I know I will have to read this book. The parts of it I have already read is very interesting and well-written so it is only time that have kept me from reading the book.

Anyway, what I really what to ask my readers is the following: What books have had the biggest influence on your thinking about monetary theory and monetary history? I would love to be able to make a top ten list of monetary must-read books for the readers of this blog. So please give me your input. I will keep asking this question until I got at least 10 books. If you don’t want to put your name out here in the comment section drop me a mail instead:


“…political news kept slipping into the financial section”

As global stock markets once again takes another downturn on the back of renewed European worries I am reminded about a great blog post Scott Sumner wrote a couple a months ago about his studies of the Great Depression.
In its Scott says:

“And the worst part was the way political news kept slipping into the financial section. Nazis make ominous gains in the 1932 German elections, Spanish Civil War, etc, etc. In the 1930s the readers didn’t know what came next—but I did.”

Working and following the financial market on a daily basis, one gets the same feeling. Everything dependents on politics – who will bail out who and who will pay? I long for the day when the markets return to being markets and we will not have to worry about political news…However, I am afraid that that day is not around the corner anytime soon.

Sexy new model could shed light on the Great Recession

Market Monetarists like myself claim that the Great Recession mostly was caused by the fact that the Federal Reserve and other central banks failed to meet a sharp increase in the demand for dollars. Hence, what we saw is what David Beckworth has termed a “passive” tightening of monetary policy.

I have come across a (rather) new paper that might be able to shed more light on what impact the increase in money demand had in the Great Recession.

Te paper by Irina A. Telyukova and Ludo Visschers presents a rather sexy model (that’s an economic model…), but has a rather unsexy title “Precautionary Demand for Money in a Monetary Business Cycle Model”. Here is the abstract:

“We investigate quantitative implications of precautionary demand for money for business cycle dynamics of velocity and other nominal aggregates. Accounting for such dynamics is a standing challenge in monetary macroeconomics: standard business cycle models that have incorporated money have failed to generate realistic predictions in this regard. In those models, the only uncertainty affecting money demand is aggregate. We investigate a model with uninsurable idiosyncratic uncertainty about liquidity need and find that the resulting precautionary motive for holding money produces substantial qualitative and quantitative improvements in accounting for business cycle behavior of nominal variables, at no cost to real variables.”

Hence, Telyukova and Visschers incorporate shocks to money velocity from increases in what they call “precautionary demand for money” into a dynamic business cycle model. The model is yielding rather interesting results, but it is also a rather technical paper so it might be hard to understand if you are a none-technical economist.
Anyway, the conclusion is relatively clear:

“By incorporating this idiosyncratic risk into a standard monetary model with aggregate risk, and by carefully calibrating the idiosyncratic shocks to data, we find that the model matches many dynamic moments of nominal variables well, and greatly improves on the performance of existing monetary models that do not incorporate such idiosyncratic shocks. We show that our results are robust to multiple possible ways of calibrating the model. We show also that omitting precautionary demand while targeting, in calibration, data properties of money demand – a standard calibration practice produces inferior performance in terms of matching the data, potentially misleading implications for parameters of the model, and may therefore adversely affect the model’s policy implications as well.”

The paper was first written back in June 2008 (talk about good timing) and then later updated in March 2011. Oddly enough the paper does not make any reference to the Great Recession! This is typical of this kind of technical papers – even though the results are highly relevant the authors fail to notice that (or ignore it). That does not, however, change the fact that Telyukova’s and Visschers’ paper could clearly shed new light on the Great Recession.

As I see it the Telyukova-Visschers model could be used in two ways which would be directly relevant for monetary policy making. 1) Use the model to simulate the Great Recession. Can the increase in precautionary demand for money account for the Great Recession? 2) The model can be used to test how different policy rules (NGDP targeting, price level, inflation targeting, a McCallum rule, Taylor rule etc.) will work and react to shocks to money demand. I hope that is the direction that Telyukova and Visschers will take their research in the future.

%d bloggers like this: