TY - JOUR
T1 - Would a free banking system stabilize NGDP growth?
AU - Salter, Alexander William
AU - Young, Andrew T.
N1 - Publisher Copyright:
© 2018 Board of Trustees of the University of Illinois
PY - 2018/11
Y1 - 2018/11
N2 - 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 banking 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.
AB - 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 banking 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.
KW - Business cycles
KW - Free banking
KW - Inflation targeting
KW - Macroeconomic stability
KW - Monetary policy rules
KW - NGDP targeting
UR - http://www.scopus.com/inward/record.url?scp=85046792248&partnerID=8YFLogxK
U2 - 10.1016/j.qref.2018.04.016
DO - 10.1016/j.qref.2018.04.016
M3 - Article
AN - SCOPUS:85046792248
VL - 70
SP - 21
EP - 25
JO - Quarterly Review of Economics and Finance
JF - Quarterly Review of Economics and Finance
SN - 1062-9769
ER -