Eastern Economic Journal

, Volume 45, Issue 2, pp 250–268 | Cite as

Bubbles and Broad Monetary Aggregates: Toward a Consensus Approach to Business Cycles

  • Cameron HarwickEmail author
Original Article


A challenge for quantity-theoretic explanations of business cycles is that recessions manifest despite central banks’ scrupulousness to avoid falls in monetary aggregates, a fact which would seem to indicate a structural explanation. This paper argues that a broader and theoretically richer Divisia aggregate—which reflects changes in financial market liquidity even without changes in the quantity of any particular asset—can reconcile these two approaches. Liquidity shocks such as the rise and collapse of asset bubbles can drive excess supply of and demand for money, respectively, that quantity theorists point to as determinative of short-run economic fluctuations.


Business cycles Divisia Monetary policy Quantity theory Asset bubbles 

JEL Classification

E32 E44 E51 



I am grateful to Lawrence White, Scott Burns, Peter Ireland, and several anonymous reviewers for helpful comments on earlier drafts. Errors and ill-conceived ideas are my own.


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Copyright information

© EEA 2018

Authors and Affiliations

  1. 1.The College at BrockportBrockportUSA

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