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Fall 2013

ISSN 0890-913X

Volume 29, Number 1

Categories: Fall 2013 | Banking | Finance

A Comparative Analysis of Free Banking and Central Bank NGDP Targeting

Ryan H. Murphy, Southern Methodist University

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TheJournalofPrivateEnterprise29(1),2013,25–39AComparativeInstitutionalAnalysisofFreeBankingandCentralBankNGDPTargetingRyanH.Murphy*SuffolkUniversityAbstractThispaperarguesthatthechoicebetweenfreebankingandcentralbankNGDPtargetingisadifficulttoanswerempiricalquestion,contrarytothepositionofthoseoneithersideofthedebate.Publicchoiceconcerns,thelackofthesignalsofprofitandloss,andoptimaldeterminationofcurrencyareasarepointsagainstanyformofcentralbanking.However,freebankingmaybesuboptimalrelativetocentralbankNGDPtargetingforthreereasonsexploredhere.Untilmoredatabecomeavailable,itisimpossibletogaugetherelativeimportanceofonesetofthesetradeoffsagainsttheother.JELCodes:E24,E42,D70Keywords:Freebanking;NGDPtargeting;Publicchoice;ComparativeinstitutionalanalysisI.IntroductionAstheGreatRecessioncontinued,someofthemostardentsupportersofthefreemarketbeganentertainingthepossibilitythat“demand-side”problemswerecausingpersistentunemployment.Althoughtheright-wingpresshascriticizedtheuntraditionalbehaviorofcentralbanks,monetarypolicyactuallyappearedtightbythestandardsetforthbyoneofthemosteminentandstringentinflationhawksofthe20thcentury,F.A.Hayek.Thisstandardrequiresconstanttotaloverallspendingintheeconomy(Hayek,1931;White,1999).ThisimpliesthatM*Vshouldbekeptataconstantlevelformoneytoremain“neutral.”Followingtheequationofexchange,thisisineffectthesameasaNominalGrossDomesticProduct(NGDP)targetof0%.Forthefirsttimeinmanyyears,NGDPfellintheUnitedStates,suggestingthatmoneymayhavebeentootightfromthestandpointofevenHayek.*TheauthorwouldliketothankGeorgeSelgin,LarsChristensen,ScottSumner,LeeKelly,BenjaminPowell,ColinO’Reilly,andNicolasCachanoskyfortheirhelpfulcomments.Anyerrorsaresolelyhisresponsibility.25

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Metadata [hide]

Title	A Comparative Analysis of Free Banking and Central Bank NGDP Targeting
Authors/Creators:	Ryan H. Murphy, Southern Methodist University
Year:	2013
Volume:	29
Number:	1
Pages:	25 - 39
Publisher:	The Association of Private Enterprise Education
ISSN:	0890-913X
Document Type:	Articles
Keywords:	Banking, Finance

Citation:
Murphy, Ryan H. / 2013. "A Comparative Analysis of Free Banking and Central Bank NGDP Targeting." The Journal of Private Enterprise, 29(1): 25-39.