De Economist

, Volume 141, Issue 4, pp 497–514 | Cite as

An oligopoly model of free banking: Theory and tests

  • Michael R. Baye
  • Paul De Grauwe
  • Casper G. de Vries
Article
  • 37 Downloads

Summary

The paper demonstrates that in an environment of free banking where some agents have imperfect information regarding the circulation and debasement rates of alternative money suppliers, the equilibrium supply of money involves mixed strategies. It follows that the circulation and debasement rates are intrinsically stochastic, but that their averages are below the rates set by a monopoly bank. Empirical tests reveal that these predictions are consistent with the free banking era of the United States. The paper is also relevant for the discussion about the future monetary union in the EC.

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Copyright information

© Stenfert Kroese 1993

Authors and Affiliations

  • Michael R. Baye
    • 2
  • Paul De Grauwe
    • 3
  • Casper G. de Vries
    • 1
  1. 1.Pennsylvania State UniversityUSA
  2. 2.Katholieke Universiteit LeuvenLeuvenBelgium
  3. 3.Erasmus University/Tinbergen Institute RotterdamRotterdamThe Netherlands

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