The super-alertness of central banks

Abstract

This paper applies Kirzner’s theory of entrepreneurial alertness to central banking. As opposed to entrepreneurs operating within the market, central banks can operate outside the market by defining its structure and regulations. We label as “super-alertness” the particular type of Kirznerian alertness that central banks are required to have to successfully achieve stable monetary equilibrium.

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Notes

  1. 1.

    Cachanosky (2017) offers a financial interpretation of Kirznerian alertness.

  2. 2.

    This point is not as trivial as it seems, since historical episodes that lack a central bank but are subject to a number of regulations are sometimes described as free banking. The imbalances produced by ineffective regulations are then assumed to be proof of the inherent instability of an unregulated money and banking market. See, for instance, Selgin’s (1988, Chapter 1) discussion on the pre-Federal Reserve era in the United States and Cachanosky (2012) for the case of Argentina in the late nineteenth century.

  3. 3.

    Even today, some commercial banks in Scotland, Ireland, and Hong-Kong, issue convertible banknotes. See Hogan (2012).

  4. 4.

    A key reference in support of banking’s inherent instability is Diamond and Dybvig’s (1983) model of bank runs. We cannot offer a detailed analysis here of the challenges rised to their model. It has been pointed out, for instance, that their model of banking crisis does not have money and banks do not issue loans among other shortcomings that make it quesitonable as a “proof” of inhernet financial instability. For a more detailed discussion see Cachanosky (2018, Chapter 1), Dowd (1992a), (1996, Chapters 1, 3), and White (1999, Chapter 6).

  5. 5.

    In the equation of exchange, MV = PY, M represents money supply, V the velocity of circulation, P the GDP deflator, and Y real GDP (then PY = NGDP).

  6. 6.

    It should be noted that how the right level of noninal income is achieved is also important. It is not the same when the nominal income is a bottom-up proces that originates in economic agents, than when it is an bottom-up process dictated by a central authority such as a central bank (Salter 2013).

  7. 7.

    This is not to say that goods do not have an impact on the market. The invention of the car, the computer, mobile phones, etcetera, had a large impact on how the market works. Still, they are closing previously undiscovered disequilibria.

  8. 8.

    By fixing the interest rate, the central bank commits to expand (contract) money supply as needed to keep the interest rate unchanged.

  9. 9.

    On IOER see Dutkowsky and VanHoose (2017), Hendrickson (2017), and Hogan (2018), and Selgin (2018).

  10. 10.

    Also see Fuster et al. (2010).

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Correspondence to Nicolás Cachanosky.

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Cachanosky, N., Salter, A.W. The super-alertness of central banks. Rev Austrian Econ 33, 187–200 (2020). https://doi.org/10.1007/s11138-019-00436-1

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Keywords

  • Free banking
  • Central banking
  • Alertness
  • Super-alertness
  • Monetary equilibrium

JEL classification

  • B53
  • D80
  • E50