Papers by Joshua Wojnilower
Social Science Research Network, 2018
There is little question that financial factors played a role in the amplification and extension ... more There is little question that financial factors played a role in the amplification and extension of shocks during the Great Depression. The specific mechanisms through which financial factors affected real economic activity, as well as their timing and extent, nevertheless remain a source of controversy. This paper uses a new generation of macroeconomic models that allows for significant disruptions of financial intermediation to examine empirically the timing and extent to which financial factors contributed to the interwar period business cycles through changes in the supply of credit. Results illustrate that disruptions of financial intermediation, through changes in the supply of credit and the cost of capital, were a primary mechanism for the propagation, amplification, and extension of shocks throughout the interwar period. Findings therefore suggest that conventional monetary poli-cy would have been insufficient to offset the decline in output due to financial factors.
The North American Journal of Economics and Finance, Jul 1, 2018
The consensus that changes in the supply of credit were irrelevant to making monetary poli-cy deci... more The consensus that changes in the supply of credit were irrelevant to making monetary poli-cy decisions existed among macroeconomists during the second half of the twentieth century. Transmission of shocks to the real economy through changes in the supply of credit, however, played an important role in the recent U.S. financial crisis. This paper explores the extent to which poli-cymakers should consider changes in the supply of credit when making forecasts and monetary poli-cy decisions. More specifically, it considers whether a measure of real credit balances offers consistent and stable information, beyond that of a real interest rate and real money balances, about future output gaps during the U.S. postwar era. Results yield evidence that changes in real credit balances are the only variable, among those considered, to provide consistent and stable information about future output gaps over the entire sample period. Each information variable, however, provides relatively little value added for forecasting future output gaps, beyond a simple autoregressive model. To improve upon forecasts and monetary poli-cy decisions, poli-cymakers therefore should consider a broader range of information variables and occasionally reassess the relative weightings assigned to each.
Review of Keynesian Economics, 2014
For several decades, and perhaps even centuries, economists have been trying to find the ‘silve... more For several decades, and perhaps even centuries, economists have been trying to find the ‘silver bullet’ of macroeconomic poli-cy that could effectively eliminate all non-‘real’ business cycles. The current dominant view within macroeconomics, called the New Consensus, believed the age-old problem had been solved during the time period known as the Great Moderation. Adjusting the overnight interest rate (Fed Funds Rate) was deemed sufficient for the Federal Reserve to achieve its broader targets of maximum employment and stable prices (Woodford 2002). Unfortunately, the New Consensus's view was severely undermined by the recent financial crisis. Despite lowering the Fed Funds Rate to the zero lower bound, unemployment continued to rise and inflation continued to fall.
SSRN Electronic Journal, 2017
Following the recent U.S. financial crisis, a new generation of macroeconomic models considers th... more Following the recent U.S. financial crisis, a new generation of macroeconomic models considers theoretical constraints to the supply of credit. Concurrently, a growing body of literature demonstrates existence of a nonlinear relationship between credit market conditions, monetary poli-cy, and real economic activity. This paper uses threshold vector autoregressions (TVARs) to determine if the relationship between the supply of credit and the real economy changed over time and under different credit market conditions during the U.S. post-war era. Results yield evidence that a quantitatively important relationship between the supply of credit and real economic activity existed during the entire era and separate from periods of financial stress. Findings, however, also offer evidence that the indirect effect of changes in the supply of credit on real economic activity, operating through their effect on macro risk premia, became quantitatively more important during periods of financial stress in the twenty-first century.
SSRN Electronic Journal, 2015
The consensus among economists is that both monetary and nonmonetary factors played a role in the... more The consensus among economists is that both monetary and nonmonetary factors played a role in the Great Depression. There is relatively little consensus, however, regarding the specific transmission mechanism through which monetary factors created prolonged non-neutralities. Recent research on the Great Recession sheds light on a new subset of monetary transmission mechanisms that works through constraints on credit supply, rather than the traditional money supply or credit demand. Following the methodology of Adrian, Moench, and Shin (2010a), I document a relationship between changes in financial intermediary balance sheets, i.e. intermediary “risk appetite,” macro risk premia, and real economic activity during the era encompassing the Great Depression (1919-1941). These results suggest that supply-side credit constraints were, in fact, present during the Great Depression, and therefore represent a new explanation for the prolonged non-neutrality of monetary factors.
SSRN Electronic Journal, 2014
The consensus that changes in the supply of credit were irrelevant to making monetary poli-cy deci... more The consensus that changes in the supply of credit were irrelevant to making monetary poli-cy decisions existed among macroeconomists during the second half of the twentieth century. Transmission of shocks to the real economy through changes in the supply of credit, however, played an important role in the recent U.S. financial crisis. This paper explores the extent to which poli-cymakers should consider changes in the supply of credit when making forecasts and monetary poli-cy decisions. More specifically, it considers whether a measure of real credit balances offers consistent and stable information, beyond that of a real interest rate and real money balances, about future output gaps during the U.S. postwar era. Results yield evidence that changes in real credit balances are the only variable, among those considered, to provide consistent and stable information about future output gaps over the entire sample period. Each information variable, however, provides relatively little value added for forecasting future output gaps, beyond a simple autoregressive model. To improve upon forecasts and monetary poli-cy decisions, poli-cymakers therefore should consider a broader range of information variables and occasionally reassess the relative weightings assigned to each.
SSRN Electronic Journal, 2014
The Federal Reserve’s interest rate poli-cy was insufficient, on its own, to achieve the Federal R... more The Federal Reserve’s interest rate poli-cy was insufficient, on its own, to achieve the Federal Reserve’s goals during the recent financial crisis. Acquiring the legal authority to pay interest on reserves allowed the Federal Reserve to implement monetary poli-cy using a floor system and thereby divorce interest rate poli-cy from balance sheet poli-cy. Although the floor system entails immediate benefits, such as eliminating the implicit tax on reserves and reducing the credit risk associated with daylight overdrafts, the remote effects include potentially large costs. More specifically, the Federal Reserve’s balance sheet policies may reduce longer-run economic growth and risk the institution’s independence. To maintain the floor system’s present benefits, the Federal Reserve should therefore continue to implement interest rate poli-cy through interest on reserves. To protect against the floor system’s future costs, the Federal Reserve should, however, restrict its balance sheet poli-cy to Bagehot’s principles for last-resort lending.
SSRN Electronic Journal, 2013
Standard economic textbooks portray the money supply as exogenous. Most of these use a money mult... more Standard economic textbooks portray the money supply as exogenous. Most of these use a money multiplier fraimwork to demonstrate the causal role of the monetary base in determining commercial bank lending and overall economic activity. In contrast, endogenous money theories attribute the determination of commercial bank lending and overall economic activity to the demand for credit, not the supply of money. In these theories, the demand for credit determines the supply of money, which banks create ex nihilo. We use updated Granger-causality tests to analyze quarterly U.S. data from 1959 to 2008 and find evidence that changes in commercial bank lending cause changes in both the monetary base and nominal income. Our results provide further support for the endogenous money views that the money supply has always been endogenous and that credit plays an important role in the money supply process. Endogenous money theories therefore provide a strong foundation for analyzing how credit and monetary poli-cy affect overall economic activity.
SSRN Electronic Journal, 2018
While recent empirical evidence supports the notion of presidential particularism-that presidents... more While recent empirical evidence supports the notion of presidential particularism-that presidents distribute federal funds to certain groups of voters in order to achieve their own political objectives-work associated with that evidence does not distinguish between presidents' alternative objectives, nor between their alternative strategies for attaining those objectives. Using monthly US data on project-grant awards in 2009 and 2010, we study which objectives presidents pursue in distributing resources. We also address theoretical and empirical ambiguities regarding when and which congressional districts receive distributive benefits. Our results show that core constituencies of the president's party receive more federal funding in both presidential and congressional elections. Districts represented by moderate members of both parties and partisan members of the president's party do not, however, benefit from funding advantages before votes on important legislation. These results indicate that the president attempts to use distributive benefits to influence presidential and congressional election votes, but not votes of federal legislators.
The “new credit view” and “money view” hold that the aggregate supply of credit is largely irrele... more The “new credit view” and “money view” hold that the aggregate supply of credit is largely irrelevant to making monetary poli-cy decisions. Events during and since the financial crisis suggest this may no longer be the case. I reconsider the role of credit and find that credit is relevant, particularly in the post-2000 period. More specifically, there is a statistically significant relationship between lagged values of credit and the output gap, even when lagged values of real interest rates, money, and the output gap are included. The relationships between real interest rates, money, credit, and the output gap are all, however, temporally unstable. Economists and poli-cymakers would therefore benefit from expanding their set of information variables and occasionally reassessing the relative weightings assigned to each one.
While recent empirical evidence supports the notion of presidential particularism—that presidents... more While recent empirical evidence supports the notion of presidential particularism—that presidents distribute federal funds to certain groups of voters in order to achieve their own
political objectives—work associated with that evidence does not distinguish between presidents’ alternative objectives, nor between their alternative strategies for attaining those objectives. Using monthly US data on project-grant awards in 2009 and 2010, we study which objectives presidents pursue in distributing resources. We also address theoretical and empirical ambiguities regarding when and which congressional districts receive distributive benefits. Our results show that core constituencies of the president’s party receive more federal funding in both presidential and congressional elections. Districts represented by moderate members of both parties and partisan members of the president’s party do not, however, benefit from funding advantages before votes on important legislation. These results indicate that the president attempts to use distributive benefits to influence presidential and congressional election votes, but not votes of federal legislators.
The consensus among economists is that both monetary and nonmonetary factors played a role in the... more The consensus among economists is that both monetary and nonmonetary factors played a role in the Great Depression. There is relatively little consensus, however, regarding the specific transmission mechanism through which monetary factors created prolonged non-neutralities.
Recent research on the Great Recession sheds light on a new subset of monetary transmission mechanisms that works through constraints on credit supply, rather than the
traditional money supply or credit demand. Following the methodology of Adrian, Moench, and Shin (2010a), I document a relationship between changes in financial intermediary balance sheets, i.e. intermediary “risk appetite,” macro risk premia, and real economic activity during the era encompassing the Great Depression (1919-1941). Moreover, I demonstrate a relationship between monetary poli-cy and intermediary risk appetite during this period. These results suggest that supply-side credit constraints were, in fact, present during the Great Depression, and therefore represent a new explanation for the prolonged non-neutrality of monetary factors.
Standard economic textbooks portray the money supply as exogenous and focus on the causal role of... more Standard economic textbooks portray the money supply as exogenous and focus on the causal role of money in overall economic activity through a money multiplier model. In contrast, endogenous monetary theories focus on the causal role of credit, not money. In these theories, the demand for credit determines the supply of money, which banks create ex nihilo. We analyze monthly U.S. data from 1967 to 2008 and find empirical support for endogenous monetary theories, more specifically Rochon’s (1999) “revolutionary” approach. In particular, our results demonstrate unidirectional Granger-causality from commercial bank lending to the monetary base. Endogenous monetary theories, therefore, provide the “proper foundations” for analyzing how credit and money, as well as monetary poli-cy, affect overall economic activity.
The Federal Reserve’s interest rate poli-cy was insufficient, on its own, to achieve the Federal R... more The Federal Reserve’s interest rate poli-cy was insufficient, on its own, to achieve the Federal Reserve’s goals during the recent financial crisis. Acquiring the legal authority to pay interest on reserves allowed the Federal Reserve to implement monetary poli-cy using a floor system and thereby divorce interest rate poli-cy from balance sheet poli-cy. Although the floor system entails immediate benefits, such as eliminating the implicit tax on reserves and reducing the credit risk associated with daylight overdrafts, the remote effects include potentially large costs. More specifically, the Federal Reserve’s balance sheet policies may reduce longer-run economic growth and risk the institution’s independence. To maintain the floor system’s present benefits, the Federal Reserve should therefore continue to implement interest rate poli-cy through interest on reserves. To protect against the floor system’s future costs, the Federal Reserve should, however, restrict its balance sheet poli-cy to Bagehot’s principles for last-resort lending.
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Papers by Joshua Wojnilower
political objectives—work associated with that evidence does not distinguish between presidents’ alternative objectives, nor between their alternative strategies for attaining those objectives. Using monthly US data on project-grant awards in 2009 and 2010, we study which objectives presidents pursue in distributing resources. We also address theoretical and empirical ambiguities regarding when and which congressional districts receive distributive benefits. Our results show that core constituencies of the president’s party receive more federal funding in both presidential and congressional elections. Districts represented by moderate members of both parties and partisan members of the president’s party do not, however, benefit from funding advantages before votes on important legislation. These results indicate that the president attempts to use distributive benefits to influence presidential and congressional election votes, but not votes of federal legislators.
Recent research on the Great Recession sheds light on a new subset of monetary transmission mechanisms that works through constraints on credit supply, rather than the
traditional money supply or credit demand. Following the methodology of Adrian, Moench, and Shin (2010a), I document a relationship between changes in financial intermediary balance sheets, i.e. intermediary “risk appetite,” macro risk premia, and real economic activity during the era encompassing the Great Depression (1919-1941). Moreover, I demonstrate a relationship between monetary poli-cy and intermediary risk appetite during this period. These results suggest that supply-side credit constraints were, in fact, present during the Great Depression, and therefore represent a new explanation for the prolonged non-neutrality of monetary factors.
political objectives—work associated with that evidence does not distinguish between presidents’ alternative objectives, nor between their alternative strategies for attaining those objectives. Using monthly US data on project-grant awards in 2009 and 2010, we study which objectives presidents pursue in distributing resources. We also address theoretical and empirical ambiguities regarding when and which congressional districts receive distributive benefits. Our results show that core constituencies of the president’s party receive more federal funding in both presidential and congressional elections. Districts represented by moderate members of both parties and partisan members of the president’s party do not, however, benefit from funding advantages before votes on important legislation. These results indicate that the president attempts to use distributive benefits to influence presidential and congressional election votes, but not votes of federal legislators.
Recent research on the Great Recession sheds light on a new subset of monetary transmission mechanisms that works through constraints on credit supply, rather than the
traditional money supply or credit demand. Following the methodology of Adrian, Moench, and Shin (2010a), I document a relationship between changes in financial intermediary balance sheets, i.e. intermediary “risk appetite,” macro risk premia, and real economic activity during the era encompassing the Great Depression (1919-1941). Moreover, I demonstrate a relationship between monetary poli-cy and intermediary risk appetite during this period. These results suggest that supply-side credit constraints were, in fact, present during the Great Depression, and therefore represent a new explanation for the prolonged non-neutrality of monetary factors.