Would a Free Banking System Target NGDP Growth?

Alexander Salter and Andrew Young ()

No 15-08, Working Papers from Department of Economics, West Virginia University

Abstract: Building on Selgin (1994), we develop a simple model of free banking and study the system’s effects on familiar macroeconomic variables. We show a free banking system does in fact stabilize nominal income in response to aggregate demand shocks. However, in the event of an aggregate supply shock, a free banking system instead stabilizes inflation, engaging in mildly procyclical behavior. We conclude by calling for a broader study of nominal income targeting and free banking in the tradition of ‘monetary constitutionalism’ (Yeager 1962; White et al. 2014) to ascertain whether this result, while almost certainly not the best of all ossible worlds, is in fact the best of all probable worlds.

Keywords: Central banking; free banking; inflation; monetary constitution; nominal income targeting (search for similar items in EconPapers)
JEL-codes: E02 E32 E42 E52 P16 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2015-05
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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