Bernanke on multiple monetary equilibria

I was very pleased to see that Ben Bernanke was awarded the Nobel Prize in Economics. Bernanke had a major influence on my thinking in several different areas. Here I will focus on Bernanke’s 1995 JMCB paper on the Great Depression. This excerpt (discussing the interrelationship of bank runs and exchange rate crises) is particularly important:

A particularly destabilizing aspect of this process was the tendency of fears about the soundness of banks and expectations of exchange-rate devaluation to reinforce each other (Bernanke and James 1991; Temin 1993). An element that the two types of crises had in common was the so-called “hot money,” short-term deposits held by foreigners in domestic banks. On one hand, expectations of devaluation induced outflows of the hot-money deposits (as well as flight by domestic depositors), which threatened to trigger general bank runs. On the other hand, a fall in confidence in a domestic banking system (arising, for example, from the failure of a major bank) often led to a flight of short-term capital from the country, draining international reserves and threatening convertibility. Other than abandoning the parity altogether, central banks could do little in the face of combined banking and exchange-rate crises, as the former seemed to demand easy money policies while the latter required
monetary tightening.

From a theoretical perspective, the sharp declines in the money-gold ratio during the early 1930s have an interesting implication: namely, that under the gold standard as it operated during this period, there appeared to be multiple potential equilibrium values of the money supply. Broadly speaking, when financial investors and other members of the public were “optimistic,” believing that the banking system would remain stable and gold parities would be defended, the money-gold ratio and hence the money stock itself remained “high.” More precisely, confidence in the banks allowed the ratio of inside money to base to remain high, while confidence in the exchange rate made central banks willing to hold foreign exchange reserves and to keep relatively low coverage ratios. In contrast, when investors and the general public became “pessimistic,” anticipating bank runs and devaluation, these expectations were to some degree self-confirming and resulted in “low” values of the money-gold ratio and the money stock. In its vulnerability to self-confirming expectations, the gold standard appears to have borne a strong analogy to a fractional-reserve banking system in the absence of deposit insurance: For example, Diamond and Dybvig (1983) have shown that in such a system there may be two Nash equilibria, one in which depositor confidence ensures that there will be no run on the bank, the other in which the fears of a run (and the resulting liquidation of the bank) are self-confirming.

These ideas run through much of my 2015 book on the Great Depression. For instance, in the spring of 1932, the Fed implemented a QE program with the goal of spurring recovery from the Great Depression. Unfortunately, this policy triggered fears of currency devaluation, which led to an outflow of gold from the US. This is one example of what Bernanke calls “multiple monetary equilibria”. As a result, under an international gold standard an expansionary policy initiative might actually end up having a contractionary impact on the economy, especially if it triggers a loss of confidence in the currency.

In the same article, Bernanke discussed evidence that sticky nominal wages may have contributed to the Great Depression:

Using data from ten European countries for 1935, Eichengreen and Sachs showed that Gold Bloc countries systematically had high real wages and low levels of industrial output, while countries not on gold had much lower real wages and higher levels of production (all variables were measured relative to 1929).

In a recent paper, Bernanke and Carey (1994) extended the Eichengreen-Sachs analysis in a number of ways: First, they expanded the sample from ten to twenty-two countries, and they employed annual data for 1931-1936 rather than for 1935 only. Second, to avoid the spurious attribution to real wages of price effects operating through non-wage channels, in regressions they separated the real wage into its nominal-wage and price-level components. Third, they controlled for factors other than wages affecting aggregate supply and used instrumental variables techniques to correct for simultaneity bias in output and wage determination. . . .

Most importantly, the coefficient on nominal wages is highly significant and approximately equal and opposite in magnitude to the coefficient on the price level, as suggested by the sticky-wage hypothesis. In particular, equation (2) indicates that countries in which nominal wages adjusted relatively slowly toward changing price levels experienced the sharpest declines in manufacturing output.

Sticky nominal wages also played a big role in my 2015 book, and more broadly the way I think about business cycles.

PS. I am currently traveling, but will have more to say about Bernanke when I return home later in the week.

PPS. Two members of what I call the “Princeton School of Monetary Economics” have now won Nobel Prizes. Who’s next?

PPPS. To those who say it’s not really a Nobel Prize, I have only two words: Get a life.

Wait, is that three?



37 Responses to “Bernanke on multiple monetary equilibria”

  1. Gravatar of Patrick R Sullivan Patrick R Sullivan
    10. October 2022 at 13:48

    Wonder if Scott remembers writing:

    “So the law [Gramm, Leach, Bliley (1999)] that provided the flexibility Bernanke needed to deal with the 2008 banking crisis, also suggested a policy reform that might have prevented the crisis entirely. Maybe Phil Gramm deserves a Nobel Prize in economics.”

    Which comes from this 2015 blogpost:

  2. Gravatar of Sara Sara
    10. October 2022 at 14:14

    Its baffling that one can win the Nobel Prize for printing excessive money. His sole claim to fame is forcing future generations of Americans to pay off the debt that his generation accumulated on a high limit credit card.

    A lot of people made terrible investments in companies that were sham and scam and when the bubble burst Bernanke and his thugs forced everyone who didn’t make bad investments to cover for those that did.

    You want bad banks to fail, because its the only way to ensure that productive money remains productive, and that investors understand that there is risk involved in investing.

    Historians in the 22nd century will be laughing at him. They will call the Nobel Prize the Nobel losers.

    The arrogance in academy is AMAZING! If only we could turn that arrogance until food and energy we’d never starve. There would be no more scarcity.

  3. Gravatar of George George
    10. October 2022 at 15:35

    It isn’t really a ‘Nobel Prize’, it’s an award made up by the communist central banking cartel and they stole the name ‘Nobel’ by naming it ‘in memory of Alfred Nobel’.

    In essence it is an award given to academics who politically promote the idea of the 5th plank of the Communist Manifesto: central banking to the public to trick the people into believing that there is an ‘intellectual’ justification for it, to dissuade the public from questioning or critiquing the idea of communism.

    For those who don’t like hearing that it’s not really a Nobel Prize: get a life, and know that your pre-emptive smears are nothing but a hollow attempt to jealously defend the indefensible.

  4. Gravatar of agrippa postumus agrippa postumus
    10. October 2022 at 15:39

    the real reason the bernank won is he is a rabid fan of the big bang theory show.

  5. Gravatar of ssumner ssumner
    10. October 2022 at 21:44

    Patrick, Thanks, I had forgotten about that post.

  6. Gravatar of Darko Darko
    11. October 2022 at 02:58

    Bernanke strongly supported and continued Greenspan’s go/stop monetary policy that caused the Great Recession. He denied that monetary policy created the housing bubble (he blamed the Chinese), and he denied that high interest rates burst the bubble and caused the financial panic (that happened by itself). He denied that an inverted yield curve and a very low rate of money growth are always warnings of incoming recession (this time is different). Everything he knew as an academic, he forgot as a policy maker, probably because he was overly impressed by Greenspan.

  7. Gravatar of Patrick R Sullivan Patrick R Sullivan
    11. October 2022 at 06:41

    David Henderson has a pretty good Op-ed on Bernanke (et al.)’s Nobel in the WSJ today: ‘An Economics Nobel for and by Central Bankers’. Even mentions Scott by name.

    I’m going to re-recommend that people read Calomiris and Haber’s, ‘Fragile By Design: The Political Origins of Banking Crises and Scarce Credit’. Some of the commenters here could profit by doing so.

  8. Gravatar of JoeMac JoeMac
    11. October 2022 at 07:37


    Years ago, didn’t you have a post where you basically argued that Bernanke’s “bank credit” view of the Great Depression was false? I think you argued that if anything there were more bank collapses in the 1920s, or something like that.

  9. Gravatar of ssumner ssumner
    11. October 2022 at 09:42

    JoeMac, I agree that the bank panics were a big problem, but I put more weight on the effect on NGDP, not the effect on credit intermediation.

  10. Gravatar of dtoh dtoh
    11. October 2022 at 10:21


    Bernanke was the smartest person to ever Chair the Fed….
    he was also the most incompetent person to ever Chair the Fed.

  11. Gravatar of Spencer Spencer
    11. October 2022 at 12:01

    “Ben Bernanke’s research team concluded, “an important part of the effect of oil price shocks [in the 1970s] on the economy results not from the change in oil prices, per se, but from the resulting tightening of monetary policy”.

    Complete nonsense. Oil is inelastic.

    The GD was due to a calamity of errors. There wasn’t enough eligible collateral for the banks to discount with the Central bank, and there wasn’t enough specie to satisfy the panic inspired demands of the public.

    The actual or “administered” prices (oligopoly, monopsony, and monopoly elements) would not be the “asked” prices, were they not “validated” by M*Vt (money X’s velocity), i.e., “validated” by the world’s Central Banks.

  12. Gravatar of Spencer Spencer
    11. October 2022 at 12:10

    Monetary lags are math constants. Monetary policy is not transmitted through interest rates. Monetary policy was transmitted through legal reserves (which Powell discontinued).

    Now we are lost without a rudder or an anchor. As I said in response to Powell removing legal reserves: “The FED will obviously, sometime in the future, lose control of the money stock.” May 8, 2020. 10:38 AMLink

  13. Gravatar of Spencer Spencer
    11. October 2022 at 12:20

    During the decade ending in 1964, money flows increased at an annual compounded rate of about 6 percent. In the nine years since 1964, the increase was more than 13 per cent, and in 1972-73, nearly 30 percent.

    Because R-gDp and presumably, the volume of goods and services offered in the markets, was increasing at a rate of less than 5 per cent, it should have been no surprise that there was an intensification of our chronic rates of inflation to devastating levels.

  14. Gravatar of Ricardo Ricardo
    11. October 2022 at 13:25

    1. Print your way out of trouble.
    2. Keep interest rates nero zero for ten years, so countries can pay debt.
    3. Create massive inflation from these easy money policies.
    4. Raise interest rates.
    5. Bankrupt everyone who can’t pay the debt at a higher interest rate, including countries.
    6. Win the Nobel Prize.

    I didn’t know it was so easy. I should have been an economist. Why did I choose physics? How stupid of me.

  15. Gravatar of George George
    11. October 2022 at 18:40

    Tulsi Gabbard is also openly stating that the Democrat Party has been completely overtaken by a CULT.

    I’ve been saying this since I started posting here. Now Democrats are leaving the party that has GONE INSANE.

  16. Gravatar of George George
    11. October 2022 at 22:44

    Remember when we didn’t have $5 billion to build a wall, but we suddenly have $700 billion to give to other countries?


    And what better way to finance international criminal money laundering scams than to have an ‘ideologically aligned’ controllers of central banks worldwide printing money out of thin air.

  17. Gravatar of MichaelM MichaelM
    12. October 2022 at 06:12

    Bernanke winning the prize was definitely pleasant to see. The other prize winners do make me curious what you think of D&D and their model, Scott. As soon as I saw they had also won, I thought of George Selgin’s posts on their model from a couple of years ago.

    Regardless of what might be thought of the model, D&D obviously deserve the prize: their model HAS been incredibly influential and it WAS an original advance in modeling the banking system within the macro-economy at the time. I just wonder whether it might not be treated with more circumspection by the rush of news articles coming out attempting to explain what their contribution was.

    How’d you feel about the other half/two-thirds of the prizes handed out, Scott?

  18. Gravatar of George George
    12. October 2022 at 07:11


  19. Gravatar of George George
    12. October 2022 at 07:26

    The FBI bribed Steele $1 million to verify his own dossier, they couldn’t prove dossier was true, but lied to FISA court to go after Trump anyway.

    This is what a COUP to OVERTURN an election ACTUALLY looks like.

    Once you’re done congratulating yourselves over a fake Nobel Prize, when will we see blog posts about this like we did when parroting msm narrative that Trump allegedly overturning elections is wrong?

  20. Gravatar of Spencer Spencer
    12. October 2022 at 10:01

    George Garvy: “Experience shows that a varying volume of money spending may be supported by a constant stock of money and, conversely, experience also teaches us that the money supply may change significantly while the rate of spending remains almost unchanged. Thus, total money spending in relation to money balances—technically, “transactions velocity”—is an important element in assessing changes in the credit situation and in business conditions.”

    Interest is the price of loan-funds [the free market’s deterministic clearing rate]. The price of money is the reciprocal of the generalized price-level [the FRB_NY’s “trading desks” bailiwick].

    If you look at the old “Total Checkable Deposit” figures (the “means-of-payment” money supply subject to required reserves), you’ll notice a stark, unparalleled, expansion in the money stock.
    Total Checkable Deposits (DISCONTINUED) (TCDNS) | FRED | St. Louis Fed (

    It’s no wonder that Powell muddied up deposit classifications.

    It’s no happenstance that it will take a 2-3 year period of zero money growth to bring inflation down to tolerable levels.

  21. Gravatar of Spencer Spencer
    13. October 2022 at 06:18

    Bernanke introduced the payment of interest on excess reserves. Banks are not intermediaries. The banks can outbid the nonbanks for loan funds, but not the other way around.

    Powell repeated Bernanke’s mistake in the Sept. 2019 repo spike (payment on interbank demand deposits higher than 1yr treasury bill or money market rates).

    The TLGP and the remuneration of IBDDs induced nonbank disintermediation (where the size of the nonbanks shrank by $6.2 trillion, whereas the commercial banks were unaffected, growing by $3.6 trillion during the same period – even while higher countercyclical bank capital cushions drained c. $1 trillion).

    Virtually all demand drafts cleared through “total checkable deposits”. But Powell deemphasized the role of money in the economy.

    To obfuscate his ruse Powell eliminated reserve requirements (whereas Dr. Richard Anderson said: “reserves are driven by payments”) and destroyed deposit classifications.

    Powell eliminated the 6 withdrawal restrictions on savings accounts, which isolated money intended for spending, from the money held as savings.

    Bernanke is lying about the “wealth effect”. Funds dissipated in financial investment (the transfer of title to goods, properties, or claims thereto), as opposed to real investment.

  22. Gravatar of Spencer Spencer
    13. October 2022 at 06:49

    Bernanke thought the credit crunch was a capital crunch, hence TARP:

    The shift (mislabeled disintermediation) by the public from indirect investment through the banks, to direct investment or investment via the nonbanks, does not apply to the commercial banks ever since Franklin D. Roosevelt’s 1933 Bank Holiday.

    Savings flowing through the nonbanks never leaves the payment’s system as anyone who has applied double-entry bookkeeping on a national scale should already know. There is just a change in the ownership of pre-existing DFI deposits within the payment’s system.

    Ever since 1933 (Roosevelt’s “Bank Holiday”), the Federal Reserve has had the capacity to take unified action, through its “open market power”, to prevent any outflow of currency from the banking system.

  23. Gravatar of Spencer Spencer
    13. October 2022 at 11:37

    Latest R-gDp estimate: 2.9 percent — October 7, 2022.

    Every time R-gDp accelerates, stocks move higher.

  24. Gravatar of George George
    13. October 2022 at 12:16

  25. Gravatar of steve steve
    13. October 2022 at 18:50

    A lot of people have written about dead people voting for many years. What usually happens is that a spouse dies close to an election. The surviving spouse goes ahead and votes the way they think the deceased would have wanted them to vote. The numbers for this are pretty low. Registrations are not the same things as votes. Counties, unless they are just loaded with money, dont necessarily prioritize finding people who died and removing them right away. As a taxpayer I am OK with that, especially since so few of these vote. Old people are more likely to vote Republican but its not a huge difference.


  26. Gravatar of George George
    13. October 2022 at 20:47

  27. Gravatar of George George
    13. October 2022 at 21:36

    Treason and Recession

  28. Gravatar of George George
    13. October 2022 at 21:49

  29. Gravatar of George George
    13. October 2022 at 22:00

    Information revealed from court trial this week:

    James Comey and his crooked cronies at the FBI were so desperate to “get Trump” that they put the equivalent of a taxpayer-funded bounty on the president’s head to frame him.

    This is ACTUAL “election interference” that the fake news msm propaganda arm of the D party has been trying to cover up for 6 years.

  30. Gravatar of George George
    14. October 2022 at 06:24

  31. Gravatar of George George
    14. October 2022 at 08:06

    I am old enough to remember just a couple of months ago when visitors to this blog imagined a CRIME took place in storing Presidential records at Mar A Lago because fake news msm told them so.

    Where are the same visitors calling for raiding and smearing as guilty of WORSE behavior of Bush I, Clinton, Bush II, or Obama?

    The radical left narrative is one gigantic con job. The cult of dialectic faith is logically structured to introduce KNOWING inconsistencies into the world, lies labelled as truths, truths labelled as conspiracies.

    “The philosophers have hitherto only interpreted the world in various ways. The point, however, is to change it.” – Karl Marx

    The cult logic STARTS with a ‘Theory’ with a capital T, and rather than adapting and changing the theory to fit the facts of reality, the cult mindset is to double down on Theory and CHANGE the world to ‘fit’ the theory, including and most especially by invoking inconsistencies into the logic of the narrative, the information, to divide humanity so as to conquer it, no matter how many people are to be harmed and killed by the cult devotion.

    With a supreme irony, the loudest accusers of MAGA as a ‘personality cult’ are THEMSELVES ideologically aligned with this radical left cult that is falsely presented as ‘natural’ and ‘organic’ and ‘just the way most people are’, and with megalomania at a cosmic level, every cult member from uneducated past high school all the way to PhD tenured post doctoral positions who ascribe to this logic, ALL imagine themselves as being in the upper strata of knowing ‘the real’ forces directing humanity that ‘most people are too stupid to see’, or because of one collectivist deterministic logic or another, ‘cannot possibly see’, as if determinism affects everybody…except of course the purveyors of the con.

  32. Gravatar of Spencer Spencer
    14. October 2022 at 11:57

    The FED has made the worst policy error since it began in 1913. Powell is the worst chairman in history. Powell sought to cover up his gargantuan mistake by reinventing the money stock figures.

    R-gDp is determined by a 10mo fixed rate-of-change in short-term money flows. The roc has reversed since the 1st half of the year. Short-term flows are now up. Because Powell destroyed deposit classifications, I now have to use a disclaimer.

  33. Gravatar of George George
    15. October 2022 at 08:03

    Spencer, the Fed has in fact been in a continuous ‘failure’ mode since 1913.

    It cannot logically ‘succeed’ in ‘helping’ the people because it is an anti-free market institution immune to market forces and to US laws, working AGAINST the people and FOR global communist infiltration in this country and every other country with ‘central banks’ of fiat.

    The economy can only succeed DESPITE its operations.


    These are communist infiltration events now coming to light.

  34. Gravatar of Spencer Spencer
    15. October 2022 at 08:45

    George: I don’t think people have turned their backs on electronic espionage.

    There’s a huge difference between theory and practice, i.e., between what’s possible, and what actually occurs. Empiricism is the reality that we have to deal with. Economists tend to deal with abstractions, which have, over time, tend to be disproved.

    Take James Tobin: “But time deposits and deposit certificates, though not checkable, are close substitutes for transactions deposits in many respects. So are money market funds and other assets outside banks altogether.”
    Monetary Policy – Econlib

    Or like: Barnett, W. A. (1980). “Economic Monetary Aggregates: An Application of Aggregation and Index Number Theory,” Journal of Econometrics 14: 11-48.

    Reality was demonstrated by the G.6 Debit and Demand Deposit Turnover release. But it was a statistical stepchild. Unlike M3, it was discontinued for spurious reasons.

    In our payment’s system, all the demand drafts drawn on DFIs, CUs, S&Ls cleared through DDs – except those drawn on MSBs, interbank & the U.S. government.

    I.e., income velocity, Vi, is a contrived figure. Vi, at times, moved in the opposite direction as Vt. It’s George Garvy’s transaction concept of money velocity that was empirical.

  35. Gravatar of Spencer Spencer
    15. October 2022 at 09:10

    The problem with macro is that economists are duped into believing banks are intermediaries. And bankers can’t dispel the illusion that they are not lending deposits. After all, the bankers have to maintain a positive balance of payments, stabilizing their assets with liabilities.

    Keynes’ “optical illusion” is that banks don’t lend deposits. Ergo, all bank-held savings are frozen.

    See: “Should Commercial Banks Accept Savings Deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43.

  36. Gravatar of Spencer Spencer
    15. October 2022 at 09:48

    As Scott Grannis says: “And don’t forget that 3rd qtr. nominal GDP currently is rising by leaps and bounds”

  37. Gravatar of George George
    19. October 2022 at 13:15

    Spencer: “I don’t think people have turned their backs on electronic espionage.”

    Well of course, because there are ‘people’ EXPOSING it.

    There are other ‘people’ who are looking the other way, like the FBI, and CISA, who knew about this and LIED to the public “safest most secure election in history”.

    The main point is look at the NYT article calling it a ‘conspiracy theory’ and then the very next day the CEO of Konnech was arrested.

    Perhaps it’s my software engineering background, but it seems like, on this blog at least, I am the only one who seems to appreciate the national security risks of THE FREAKING CCP HAVING ADMINISTRATOR ACCESS AND CONTROL OVER THE SOURCE CODE OF US ELECTION SYSTEMS.

    Just imagine if instead of Chyna it was Russia having this access.

    Do you remember all the Democrats LYING after the 2016 saying ‘Russia hacked our elections’? Turns out it was China that is hacking our elections, and guess what? The site owner CONTINUES TO BE TOTALLY SILENT about it.

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