Central banking,free banking,and financial crises

A Summary View In the Keynesian view, the central bank is a part of an extramarket remedy to a market malady. Investment markets are inherently unstable; government control of the economy's money supply is an important element in macroeconomic stabilization policy. The case against central banking—and for free banking—reverses the characterization of both remedy and malady. Free banking is a part of a market remedy to an extramarket malady. Even this stark reversal understates the case for free banking. It would remain valid even if we take the dramatic and chronic fiscal irresponsibility of the Treasury as given. Periodic crises that will inevitably occur in such a debt-ridden economic environment would be more ably countered by the market forces of free banking than by the policy moves of a central bank. But the extent of the Treasury's fiscal irresponsibility is itself dependent upon whether the Treasury can count on an accommodating central bank. Free banking limits the scope of this potential source of instability while at the same time enhancing the market's ability to deal with whatever instabilities that may persist.     

The robust political economy of central banking and free banking

This paper uses robust political economy to assess whether free banking or central banking can better use its institutional structures to minimize macroeconomic disequilibrium. Robust frameworks leverage their incentives, reward structures, and epistemic resources to achieve monetary policy objectives. We relax the assumptions of political pressure, self-interest, and the degree of decision makers’ knowledge to see which arrangements are more robust.     

寡头竞争、银行资金管理与存款准备金政策

利率和存款准备金政策是影响商业银行资金管理的重要因素.在一个统一的金融市场中,一家银行的利率变动必然受到其它银行利率变动及证券市场利率变动的影响,并且利率也会受到存款准备金政策变动的影响.分析表明,在古诺、勾结和准竞争的市场结构中,证券市场利率和存、贷款利率以及存款准备率和存款利率都具有一致的比较静态效应.     

Aurophobia: or,free banking on what standard?

Murray N. Rothbard is S. J. Hall distinguished professor of economics at the University of Nevada, Las Vegas and editor of theReview of Austrian Economics.     

Regulating the banking industry in transition economies: Exploring interactions between capital and reserve requirements

This paper examines the ‘prudential' role of reserve requirements in transition economies using a general-equilibrium banking model. The analysis stresses the role that reserve requirements may play in enforcing an adequate level of bank capitalization in a context in which it is difficult to assess the true value of bank assets. The paper also explores the interactions that exist between capital and reserve requirements and the effect of these regulations on the financial structure of banks and on the level of credit and interest rates.     

On not doing due diligence: Bagus and Howden on free banking

In their recent article in the Quarterly Journal of Austrian Economics, Bagus and Howden (2010) present “quibbles” with fractional-reserve free banking. Specifically, they raise what they call “unaddressed issues” in this system, with a particular emphasis on Selgin (1988). We deem their arguments to be more substantial than “quibbles” and see them as part of a longstanding debate about fundamental aspects of monetary theory. We respond to their objections and attempt to specify how debate between the two sides might proceed more productively.     

On Hayek's denationalization of money,free banking and inflation targeting 1

Abstract

Recent central bank experience with inflation targeting is used to restate Hayek's reform proposal as a performance contract. This requires banks to first state an explicit inflation target and then promise to perform a set of actions whenever an independent forecast departs from target. Making such actions explicit and observable makes the promise of price stability offered by competing banks operational and enforceable. Competition among banks then leads to convergence on current best practice in the short term and to faster performance evolution as the incentive to innovate induces improvements over the long term.     

Vickrey auctions with reserve pricing

Summary. We generalize the Vickrey auction to allow for reserve pricing in a multi-unit auction with interdependent values. In the Vickrey auction with reserve pricing, the seller determines the quantity to be made available as a function of the bidders' reports of private information, and then efficiently allocates this quantity among the bidders. Truthful bidding is a dominant strategy with private values and an ex post equilibrium with interdependent values. If the auction is followed by resale, then truthful bidding remains an equilibrium in the auction-plus-resale game. In settings with perfect resale, the Vickrey auction with reserve pricing maximizes seller revenues.Received: 31 December 2002, Revised: 5 May 2003, JEL Classification Numbers: D44, C78, D82.Correspondence to: Lawrence M. AusubelThe authors gratefully acknowledge the generous support of National Science Foundation Grants SES-97-31025, SES-01-12906 and IIS-02-05489. We appreciate valuable comments from Ilya Segal. Special thanks go to Mordecai Kurz, who served as Larry's dissertation advisor and who introduced both authors to the economics profession back at IMSSS at Stanford. Congratulations and best wishes are extended to Mordecai and his family on the happy occasion of the publication of Assets, Beliefs, and Equilibria in Economic Dynamics: Essays in Honor of Mordecai Kurz, in which this article also appears.     

Regulated firms in pollution permit markets with banking

This paper examines a competitive intertemporal market for bankable emission permits, such as sulfur dioxide allowances. Without profit regulation, firms are willing to bank permits if permit prices rise over time with the rate of interest, but will not bank if prices rise more slowly.The market achieves aggregate emission targets at least total cost if there is no profit regulation, but may not do so if firms are subject to profit regulation. Firms must arbitrage differences both in abatement cost and in the regulatory treatment of permits to achieve least total cost.The impetus for this work came from research we initiated during the Summer of 1990 for the Energy Information Agency. We would like to thank Chuck Howe for his detailed comments and enthusiasm, and Jim Alm, Dave Bjornstad, Charles deBartolome, Mike Greenwood, Robert Hahn, Douglas Hale, Carolyn Lang, Jim Markusen, Edward Morey, Till Requate, and Tom Tietenberg. We are grateful to the editor and two anonymous referees for stressing the importance of regulation in these markets and for their helpful and clarifying advice.     

Testing fractional integration with monthly data

Seasonal roots can help to explain the seasonal fluctuations in macroeconomic time series. In this paper we concentrate on monthly data and look at different versions of Robinson’s (1994) tests for testing unit roots and other fractionally integrated hypotheses when the root is located at zero and/or at the seasonal frequencies. A Monte Carlo experiment is carried out to check the power of these tests against different fractional alternatives, and an empirical application, using Spanish monthly data for the consumer price index, is also carried out in the article.     

The dynamics of a banking duopoly with capital regulations

This paper analyses the dynamics of a banking duopoly game with heterogeneous and homogeneous players (as regards the type of expectations' formation), to investigate the effects of the capital requirements introduced by international accords (Basel-I in 1988 and more recently Basel-II and Basel-III), in the context of the Monti-Klein model. This analysis reveals that the policy of introducing a capital requirement tends to stabilise the market equilibrium (both with heterogeneous and homogeneous banks). Moreover, it is shown that 1) when the capital standard is reduced the market stability is lost through a flip bifurcation and subsequently a cascade of flip bifurcations may lead to periodic cycles and chaos; 2) when the expectations are heterogeneous even the case of multi-stability may be present.Therefore, although on the one side the capital regulation is harmful for the equilibrium loans' volume and profit, on the other side it is effective in keeping or restoring the stability of the Cournot–Nash equilibrium in the banking duopoly.     

The value of online banking to small and medium-sized enterprises: evidence from firms operating in the uae free trade zones

This study estimates the willingness to pay of small and medium-sized enterprises (SMEs) for a business online banking services. The estimation utilizes a contingent valuation method employing data from 400 SMEs in the United Arab Emirates free zones. An interval regression model is used to identify company characteristics affecting WTP. The results indicate an average WTP for online banking of $518.50 per month. Firms engaging in international trade value these services at least 10% more than those with only domestic operations. Other variables that significantly affect WTP include number of employees and the transportation cost of using traditional branch banking.     

The sources of contagion risk in a banking sector with foreign ownership

Foreign-dominated banking sectors, such as those prevalent in Central and Eastern Europe, are susceptible to two major sources of systemic risk: (i) linkages between local banks and (ii) linkages between a foreign parent bank and its local subsidiary. During and after the global financial crisis, the second source of risk has been stressed by local regulators. Using a nonparametric method based on extreme value theory, we analyze interdependencies in downward risk in the banking sectors of the Czech Republic, Poland, Slovakia, and Turkey during 1994–2013. We find that the risk of contagion from a foreign parent bank to its local subsidiary is substantially smaller than the risk between two local banks.     

Deterring collusion with a reserve price: an auction experiment

Experimental Economics - We experimentally compare collusive behaviors in first-price sealed-bid auctions without and with a reserve price. Before the auction begins, a bidder may offer a bribe to...     

A theory of the non-neutrality of money with banking frictions and bank recapitalization

The unconventional monetary policy actions of the Federal Reserve during the recent Global Financial Crisis often involve implicit subsidies to banks. This paper offers a theory of the non-neutrality of money associated with capital injection into banks via nominal transfers, in an environment where banking frictions are present in the sense that there exists an agency problem between banks and their private-sector creditors. The analysis is conducted within a general equilibrium setting with two-sided financial contracting. We first show that even with perfect nominal flexibility, the recapitalization policy has real effects on the economy. We then introduce banking riskiness shocks and study optimal policy responses to such shocks.     

Deposit insurance and regulation in a Diamond-Dybvig banking model with a risky technology

Summary Three deposit insurance schemes are studied in a version of the Diamond-Dybvig banking model with a risky technology. The schemes include a full deposit guarantee and two alternatives which people have suggested as ways to limit the moral hazard problem of deposit insurance: deductible and coinsurance. Regulation to suppress the moral hazard problem under each scheme takes the form of solvency and incentive compatibility constraints. When the regulation is relaxed slightly, as it might be under regulatory error, the insurer's payout is lower under the alternatives than under the full guarantee. However, the coinsurance and deductible schemes are less effective at preventing bank runs than the full guarantee. Moreover, in some environments, even the full guarantee itself does not provide enough reassurance to rule out bank runs.I am indebted to Neil Wallace, John Kareken, Ed Green, Nobuhiro Kiyotaki, Andy McLennan, Mike Stutzer, Jan Werner and an anonymous referee for their helpful comments.