Would a Free Banking System Stabilize NGDP Growth?

17 Pages Posted: 29 Apr 2015 Last revised: 1 May 2018

See all articles by Alexander William Salter

Alexander William Salter

Texas Tech University - Rawls College of Business; American Institute for Economic Research

Andrew T. Young

Texas Tech University - Rawls College of Business

Date Written: April 24, 2018

Abstract

Since the 2008 financial crisis, a number of economists have suggested that central banks should follow an NGDP targeting rule. Other researchers have argued that a free and unregulated banking system stabilizes NGDP growth as an unintended consequence. We explore this argument in a simple model of a free banking system. We find that a free baking system does indeed stabilize NGDP growth in response to aggregate demand shocks. However, we find that in response to aggregate supply shocks it stabilizes the inflation rate. An implication of this is that, unlike an NGDP targeting central bank, a free banking system would not allow for disinflation or even deflation in response to a positive aggregate supply shock.

Keywords: Central banking, free banking, inflation, monetary constitution, nominal income targeting

JEL Classification: E02, E32, E42, E52, P16

Suggested Citation

Salter, Alexander William and Young, Andrew T., Would a Free Banking System Stabilize NGDP Growth? (April 24, 2018). Quarterly Review of Economics and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2599845 or http://dx.doi.org/10.2139/ssrn.2599845

Alexander William Salter (Contact Author)

Texas Tech University - Rawls College of Business ( email )

Lubbock, TX 79409
United States

HOME PAGE: http://awsalter.com

American Institute for Economic Research

PO Box 1000
Great Barrington, MA 01230
United States

Andrew T. Young

Texas Tech University - Rawls College of Business ( email )

Lubbock, TX 79409
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
154
rank
181,563
Abstract Views
1,075
PlumX Metrics