Milton Friedman argued that the
Great Depression was caused by the fact that the
Federal Reserve did not counteract the sudden reduction of money stock and velocity.
Ben Bernanke argued, instead, that the problem was lack of
credit, not lack of money, and hence, during the
Great Recession, the
Federal Reserve led by Bernanke provided additional credit, not additional liquidity (money), to stimulate the economy back on course. Jeff Hummel has analyzed the different implications of these two conflicting explanations. President of the
Federal Reserve Bank of Richmond,
Jeffrey M. Lacker, with Renee Haltom, has criticized Bernanke's solution because "it encourages excessive risk-taking and contributes to financial instability."
Thomas M. Humphrey and
Richard Timberlake concentrated in their book "Gold, the Real Bills Doctrine, and the Fed: Sources of Monetary Disorder 1922–1938" on the
real bills doctrine as a causative factor in the
Great Depression. It is often argued that fiscal stimulus typically increases
inflation, and hence must be counteracted by a typical central bank. Hence only monetary stimulus could work. Counter-arguments say that if the
output gap is high enough, the risk of inflation is low, or that in depressions inflation is too low but central banks are not able to achieve the required inflation rate without fiscal stimulus by the government. Monetary stimulus is often considered more neutral: decreasing interest rates make additional
investments profitable, but yet only the most additional investments, whereas fiscal stimulus where the government decides the investments may lead to
populism via
public choice theory, or
corruption. However, the government can also take
externalities into account, such as how new roads or railways benefit users who do not pay for them, and choose investments that are even more beneficial although not profitable. Supporters of
Keynesian economics are typically strongly in favor of stimulus.
Austrian economic school and
Rational expectations economists are typically against stimulus. ==Notable examples==