Fifteen years after the Global Financial Crisis: Recessions and Business Cycles in the History of Economic Thought

James Tobin and the role of commercial banks in the macroeconomics of the Keynesian era

Rubin Goulven, Université Paris 1 Panthéon-Sorbonne

If macroeconomics during the Keynesian era is defined as a form of analysis based on IS-LM and, maybe, the Solow growth model and its siblings, financial intermediaries, and commercial banks in particular, may appear like one of its most striking blind spots. But such an approach overlooks the rising importance of macroeconometric models in the practice of economists from the 1950s to the mid-1970s, both in academia and in institutions like Brookings or the Fed. Study of published and archival material documenting the building of the FRB-MIT model from 1966 to 1970 for instance, show that modeling the behavior of commercial banks was understood as a crucial step to understand the influence of monetary policy on the economy. The FRB-MIT model has a special importance because it became the macroeconometric model of the Federal Reserve Board starting in 1970. A careful look at the archival materials contained in the Franco Modigliani Papers (Modigliani was the main architect of the FRB-MIT model) shows the importance of James Tobin’s works as a source of inspiration for the modelling of banks’ behavior (Modigliani, Raasche and Cooper, 1970; see Acosta and Rubin, 2018). This leads to the subject of my Abstract for the 2023 ESHET conference. I propose to analyze the early works of James Tobin on commercial banks contained mainly in a manuscript found in the Franco Modigliani Papers and dated from 1959 and published in 1998 with Stephen Golub under the title Money, Credit and Capital. How did Tobin conceive the role of commercial banks in the economy and their importance for macroeconomic policies? How did his thinking evolve in the 1960s (Tobin, 1963, 1968, 1969)? How did his views compare to the views of contemporary economists like Gurley and Show (1960), Patinkin (1961) or Modigliani (1963)? How influent were his views? These are the questions that my contribution will explore.

Area: Eshet Conference

Keywords: History of macroeconomics, Financial Intermediaries, James Tobin, Banks, Portfolio choice