Friday, June 16, 2017

Monetary Disequilibrium

This week on the podcast I had a great time talking the monetary disequilibrium view of business cycles with Steve Horwitz. This perspective sees the deviation between desired and actual money holdings as the cause of business cycles.  Since money is the one asset on every market, all one needs to do is disrupt monetary equilibrium and you have disrupted every other market. This is not true for any other asset. The monetary disequilibrium view, in short, takes money seriously.

This understanding is different than the dominant view today that sees business cycles being the result of deviations between the expected paths of the natural and actual real interest rate. After the show I asked Steve if there was mapping between these these two views and he said yes. The views should be complementary. Nonetheless, the monetary disequilibrium view rarely get a hearing so I was really glad to do this interview with Steve. 

I have also posted below a presentation I used to give my undergraduates on monetary disequilibrium. It provides some of the graphs Steve mentioned in the interview. Finally, I highly recommend Leland Yeager's book The Fluttering Veil: Essays on Monetary Disequilibrium. Yeager was a leading advocate of this view and his book provides an accessible introduction to the topic. [Update: for those wanting a formal treatment see this Josh Hendrickson paper (ungated version)]


  1. Doctor Beckworth
    It was a pleasure listening to Doctor Horwitz interview as it was reading Leland Yeager's book.
    My own "view" of monetary disequilibrium is expressed in my post:
    I wish I could have your opinion on it.
    If possible I would like to know also how did you compute the Desired Money Supply.
    Thank you, best regards

  2. Can you post a link that has the presentation as a file?

    1. Okay, I put file link underneath the embeded presentation. You should be able to click on it and then save the file.

  3. I appreciate that. I take it that desired money supply near the end is based on some sort of regression?

    1. John, if I remember correctly, I used the approach found in Belongia-Ireland(2015)

      What they do is take the full employment level of nominal demand, (PY)*, and trend velocity, V*, and solve for M. For the former, I used the CBO's estimate:


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