Free banking and credit creation: Implications for business cycle theory

Cochran, John P.; Call, Steven T.

doi:10.1007/s12113-000-1019-z

Cited by 7 publications

(3 citation statements)

References 15 publications

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“…Friedman (1994) argues that a measure of credit is associated with nominal GDP, while Stiglitz (1989) maintains that money is important because of its relationship with credit. The institutional link between money and credit is enabled by the development of fractional reserve banking which combines loans with deposits (Cochran & Call, 2000). Moinescu (2012) argues that strong increases and decreases in credit are the transmission channel of the dynamics of nonperforming loans.…”

Section: Literature Reviewmentioning

confidence: 99%

The Determinants of Non-Performing Loans in the MINT Economies

Morakinyo

Sibanda

2016

JEBS

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This paper investigates the major determinants of non-performing loans in the MINT (Mexico, Indonesia, Nigeria and Turkey) economies. Identifying major determinants of non-performing loans, which are observed to be growing in these countries in recent time, will also guide policy and forecasting future levels that will be useful for pre-emptive policies and actions. It uses static panel data and dynamic panel model analyses. Evidence suggests that in the four economies, capital adequacy ratio, liquidity ratio, total bank credit andreturn on assets are significant bank-specific determinants of non-performing loans. Also, while the return on assets, liquidity ratio and capital adequacy ratioshow a negative and significant relationship with non-performing loans, nominal exchange rate, money supply growth rate, total bank credit and lending rate show positive and very significant relationships with non-performing loans. Finally, corruption, an institutional variable, shows a very strong positive relationship with non-performing loans.

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Section: Literature Reviewmentioning

confidence: 99%

The Determinants of Non-Performing Loans in the MINT Economies

Morakinyo

Sibanda

2016

JEBS

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“…The proposition holds that 100% reserve banking, as well as central banking, has economically detrimental effects because it cannot maintain monetary equilibrium, resulting in costly and unavoidable recessions. For Bagus and Howden (at p. 31), fractional reserve-free banking not only fails to restore the monetary equilibrium it alleges to create but also generates effects, inflation and deflation, as a consequence of monetary disequilibrium across the business cycle, which most free banking advocates consider detrimental (Horwitz, 1996; Cochran and Call, 2000). Monetary equilibrium is defined by Selgin as ‘the state of affairs that prevails when there is neither an excess demand for money nor an excess supply of it at the existing level of prices’ (1988 at p. 54).…”

Section: Literature Reviewmentioning

confidence: 99%

Free banking theory: literature review and relevance to the regulation of cryptocurrencies debate

Norton

2024

JFRC

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Purpose Free banking theory, as developed in Adam Smith’s 1776 treatise, “The Wealth of Nations” is a useful tool in determining the extent to which the “invisible hand of the market” should prevail in regulatory policy. The purpose of this study is to provide a timely review of the literature, evaluating the theory’s relevance to regulation of financial technology generally and cryptocurrencies (cryptos) specifically. Design/methodology/approach The methodology is qualitative, applying free banking theory as developed in the literature to technology-defined environments. Recent legislative developments in the regulation of cryptocurrencies in the UK, European Union and the USA, are drawn upon. Findings Participants in volatile cryptocurrency markets should bear the consequences of inadvisable investments in accordance with free banking theory. The decentralised nature of cryptocurrencies and the exchanges on which these are traded militate against coordinated oversight by central banks, supporting a qualified free banking approach. Differences regarding statutory definitions of cryptos as units of exchange, tokens or investment securities and the propensity of these to transition between categories across the business cycle render attempts at concerted classification at the international level problematic. Prevention of criminality through extension of Suspicious Activity Reporting to exchanges and intermediaries should be the principal objective of policymakers, rather than definitions of evolving products that risk stifling technological innovation. Originality/value The study proposes that instead of a traditional regulatory approach to cryptos, which emphasises holders’ safety and compensation, a free banking approach combined with a focus on criminality would be a more effective and pragmatic way forward.

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“…Friedman (1994) argues that a measure of credit is associated with nominal gross domestic product (GDP), while Stiglitz (1989) maintains that money is important because of its relationship with credit. The institutional link between money and credit is enabled by the development of fractional reserve banking, which combines loans with deposits (Cochran, Call, 2000). Moinescu (2012) argues that strong increases and decreases in credit are the transmission channels of the dynamics of non-performing loans.…”

Section: Literature Reviewmentioning

confidence: 99%

Non-Performing Loans, Banking System and Macroeconomy

Morakinyo

Muller

Sibanda

2018

Studia Universitatis Babes-Bolyai Oeconomica

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The study builds on previous studies of the consequences of non-performing loans on an economy. Using a seven-by-seven matrix in the impulse response function (IRF) of the structural autoregressive model, we find a long-run impact of an impulse to non-performing loans on the banking system and the macroeconomy in Nigeria. Conversely, non-performing loans also respond to the innovation of all macro-banking variables aside from the exchange rate and the growth rate to GDP. Also, the level of non-performing loans grows in influence in relation to the changes to the exchange rate using the variance decomposition tool of Structural VAR. Hence, a prominent role is assigned to the level of NPLs in linking the friction in the credit market to the susceptibility of both the banking system and the macroeconomy. This study passes the serial correlation tests and the three tests of normality.

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Free banking and credit creation: Implications for business cycle theory

Cited by 7 publications

References 15 publications

The Determinants of Non-Performing Loans in the MINT Economies

The Determinants of Non-Performing Loans in the MINT Economies

Free banking theory: literature review and relevance to the regulation of cryptocurrencies debate

Non-Performing Loans, Banking System and Macroeconomy

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