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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
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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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    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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