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Macroeconomic stability in a free banking system

  • David Vanhoose

This paper uses a simple general equilibrium banking model to examine how permitting banks to issue notes might affect macroeconomic stability. Adding banknotes to the menu of available liabilities alters the interest sensitivities of bank security and deposit choices. This changes the slope of the economy's LM schedule and the magnitude of its displacement in the face of financial market disturbances. However, the theoretical directions of these changes that free banking would induce are ambiguous. While empirical evidence permits some speculation that free banking actually could reduce stability in the face of expenditure (IS) shocks, the key point of this paper is that any theoretical case favoring free banking cannot rest on an argument that free banking unambiguously would stabilize equilibrium nominal income. Copyright International Atlantic Economic Society 1997

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File URL: http://hdl.handle.net/10.1007/BF02298344
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Article provided by International Atlantic Economic Society in its journal Atlantic Economic Journal.

Volume (Year): 25 (1997)
Issue (Month): 4 (December)
Pages: 331-343

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Handle: RePEc:kap:atlecj:v:25:y:1997:i:4:p:331-343
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  1. Baltensperger, Ernst, 1980. "Alternative approaches to the theory of the banking firm," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 1-37, January.
  2. Santomero, Anthony M & Siegel, Jeremy J, 1982. " A General Equilibrium Money and Banking Paradigm," Journal of Finance, American Finance Association, vol. 37(2), pages 357-69, May.
  3. Hutchison, David E, 1995. "Retail Bank Deposit Pricing: An Intertemporal Asset Pricing Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 217-31, February.
  4. King, Robert G., 1983. "On the economics of private money," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 127-158.
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  8. Saving, Thomas R., 1977. "A theory of the money supply with competitive banking," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 289-303, July.
  9. Elyasiani, Elyas & Kopecky, Kenneth J & VanHoose, David, 1995. "Costs of Adjustment, Portfolio Separation, and the Dynamic Behavior of Bank Loans and Deposits," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 955-74, November.
  10. Selgin, George, 1994. "Free Banking and Monetary Control," Economic Journal, Royal Economic Society, vol. 104(427), pages 1449-59, November.
  11. Poole, William, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, MIT Press, vol. 84(2), pages 197-216, May.
  12. Gordon, David B & Leeper, Eric M, 1994. "The Dynamic Impacts of Monetary Policy: An Exercise in Tentative Identification," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1228-47, December.
  13. Richard H. Timberlake, 1986. "Institutional Evolution of Federal Reserve Hegemony," Cato Journal, Cato Journal, Cato Institute, vol. 5(3), pages 743-769, Winter.
  14. Brunner, Karl & Meltzer, Allan H., 1981. "Time deposits in the Brunner-Meltzer model of asset markets," Journal of Monetary Economics, Elsevier, vol. 7(1), pages 129-139.
  15. Giannini, Curzio, 1995. "Money, trust, and central banking," Journal of Economics and Business, Elsevier, vol. 47(2), pages 217-237, May.
  16. David B. Humphrey, 1990. "Why do estimates of bank scale economies differ?," Economic Review, Federal Reserve Bank of Richmond, issue Sep, pages 38-50.
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