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A Letter on Full-Reserve Banking and Friedman’s Rule in Chicago Tradition

Gerasimos Soldatos () and Erotokritos Varelas

Credit and Capital Markets, 2014, vol. 47, issue 4, 677-687

Abstract: Post-war Chicago School advanced a blend of pre-war Chicago and non-Chicago quantity theory, termed Monetarism. The preponderance of the non-Chicago element in this blend has been documented well by the relevant literature. This note maintains that monetarism’s only contribution to pre-war Chicago is the kpercent rule as a powerful countercyclical policy instrument, indeed, along with the cyclically-balanced-budget and no-open-market-operations rules put forth by pre-war Chicago. Early Chicago’s thinking was motivated by what nowadays is called Quantity Theory of Credit too, and a full-reserve banking rule was also included as a policy instrument. This rule was advanced from the viewpoint of nobank- money-rule. By identifying bank money with commercial bank seigniorage, this rule is found here to be consistent with any value of the reserve ratio that nullifies such a seigniorage depending on the bank profit margin. This rule is also as price stabilizing as the k-percent rule, and this is the reason the contribution of the latter to Chicagoan policymaking is linked to its countercyclical rather than anti-inflationary power.

Keywords: Chicago School; Full-reserve banking; No-bank-money locus-rule; Friedman’s rule; counter cyclically balanced budget (search for similar items in EconPapers)
JEL-codes: B26 E52 (search for similar items in EconPapers)
Date: 2014
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