The Reliance on Credit

Where are we?

Following the Secret Economist's Altig link brought me to this:

Scratch any gathering of macroeconomists these days and out will bleed a steady stream directed at incorporating credit and financial market activity into thinking about the aggregate economy. The necessity of proceeding with that work was emphasized by no less an authority than Don Kohn, vice chairman of the Federal Reserve Board of Governors, speaking at just such a gathering of macroeconomists last week:

"It is fair to say, however, that the core macroeconomic modeling framework used at the Federal Reserve and other central banks around the world has included, at best, only a limited role for the balance sheets of households and firms, credit provision, and financial intermediation. The features suggested by the literature on the role of credit in the transmission of policy have not yet become prominent ingredients in models used at central banks or in much academic research."

I will admit that economists were not exactly ahead of the curve with this agenda, but prior to 2007 it was not at all clear that detailed descriptions of how funds moved from lenders to borrowers or how short-term interest rates are transmitted to longer-term interest rates and capital accumulation decisions were crucial to getting monetary policy right.

Yeah, Idunno what to say. There's a steady scream directed at incorporating credit and financial market activity into thinking about the aggregate economy. But the role of credit in the transmission of policy has not yet become prominent. Indeed, economists are not exactly ahead of the curve.

People have been pointing to debt as the problem since, oh, Reagan maybe? And debt is the measure of credit in use. If we have too much debt it means we have too much credit in use. Credit in use looks like money: It circulates. It gets spent. It contributes to inflation. It contributes to economic growth. And (unlike non-credit money) it contributes to costs. The cost of using credit contributes to the cost of living and to the cost of doing business. But, as David Altig (senior vice president and research director at the Atlanta Fed) says, "prior to 2007 it was not at all clear that detailed descriptions of how funds moved from lenders to borrowers or how short-term interest rates are transmitted to longer-term interest rates and capital accumulation decisions were crucial to getting monetary policy right."

Whatever.