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Would a Free Banking System Target NGDP Growth?

Author

Listed:
  • Alexander William Salter

    (Berry College, Department of Economics)

  • Andrew T. Young

    (West Virginia University, College of Business and Economics)

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.

Suggested Citation

  • Alexander William Salter & Andrew T. Young, 2015. "Would a Free Banking System Target NGDP Growth?," Working Papers 15-08, Department of Economics, West Virginia University.
    • Handle: RePEc:wvu:wpaper:15-08
    as

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    File URL: https://researchrepository.wvu.edu/cgi/viewcontent.cgi?article=1138&context=econ_working-papers
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    References listed on IDEAS

    as
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    2. Sumner, Scott, 1995. "The Impact of Futures Price Targeting on the Precision and Credibility of Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 89-106, February.
    3. Selgin, George, 1994. "Free Banking and Monetary Control," Economic Journal, Royal Economic Society, vol. 104(427), pages 1449-1459, November.
    4. Selgin, George, 2001. "In-Concert Overexpansion and the Precautionary Demand for Bank Reserves," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 294-300, May.
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    6. Alexander William Salter, 2013. "Not all NGDP Is Created Equal: A Critique of Market Monetarism," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 29(Fall 2013), pages 41-52.
    7. Bennett T. McCallum & Edward Nelson, 1999. "Performance of Operational Policy Rules in an Estimated Semiclassical Structural Model," NBER Chapters, in: Monetary Policy Rules, pages 15-56, National Bureau of Economic Research, Inc.
    8. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530, Elsevier.
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    Cited by:

    1. Salter, Alexander William & Tarko, Vlad, 2017. "Polycentric banking and macroeconomic stability," Business and Politics, Cambridge University Press, vol. 19(2), pages 365-395, June.

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    More about this item

    Keywords

    Central banking; free banking; inflation; monetary constitution; nominal income targeting;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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