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Fall 2013
ISSN 0890-913X
Volume 29, Number 1

A Comparative Analysis of Free Banking and Central Bank NGDP Targeting

Ryan H. Murphy, Southern Methodist University
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/index.php?action=ajax&rs=GDMgetPage&rsargs[]=JPE Fall 13 v2_part2.pdf&rsargs[]=0
TheJournalofPrivateEnterprise29(1),2013,2539AComparativeInstitutionalAnalysisofFreeBankingandCentralBankNGDPTargetingRyanH.Murphy*SuffolkUniversityAbstractThispaperarguesthatthechoicebetweenfreebankingandcentralbankNGDPtargetingisadifficulttoanswerempiricalquestion,contrarytothepositionofthoseoneithersideofthedebate.Publicchoiceconcerns,thelackofthesignalsofprofitandloss,andoptimaldeterminationofcurrencyareasarepointsagainstanyformofcentralbanking.However,freebankingmaybesuboptimalrelativetocentralbankNGDPtargetingforthreereasonsexploredhere.Untilmoredatabecomeavailable,itisimpossibletogaugetherelativeimportanceofonesetofthesetradeoffsagainsttheother.JELCodes:E24,E42,D70Keywords:Freebanking;NGDPtargeting;Publicchoice;ComparativeinstitutionalanalysisI.IntroductionAstheGreatRecessioncontinued,someofthemostardentsupportersofthefreemarketbeganentertainingthepossibilitythatdemand-sideproblemswerecausingpersistentunemployment.Althoughtheright-wingpresshascriticizedtheuntraditionalbehaviorofcentralbanks,monetarypolicyactuallyappearedtightbythestandardsetforthbyoneofthemosteminentandstringentinflationhawksofthe20thcentury,F.A.Hayek.Thisstandardrequiresconstanttotaloverallspendingintheeconomy(Hayek,1931;White,1999).ThisimpliesthatM*Vshouldbekeptataconstantlevelformoneytoremainneutral.”Followingtheequationofexchange,thisisineffectthesameasaNominalGrossDomesticProduct(NGDP)targetof0%.Forthefirsttimeinmanyyears,NGDPfellintheUnitedStates,suggestingthatmoneymayhavebeentootightfromthestandpointofevenHayek.*TheauthorwouldliketothankGeorgeSelgin,LarsChristensen,ScottSumner,LeeKelly,BenjaminPowell,ColinOReilly,andNicolasCachanoskyfortheirhelpfulcomments.Anyerrorsaresolelyhisresponsibility.25
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