The super-alertness of central banks


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.

This is a preview of subscription content, log in to check access.


  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).


  1. Anderson, B. M. (1949). Economics And The Public Welfare (1980 ed.). Indianapolis: Liberty Fund.

  2. Bernanke, Ben S. (2013). The Federal Reserve and the Financial Crisis: Lectures by Ben S. Bernanke. Princeton: Princeton University Press

  3. Bernanke, B. S. (2015). The courage to act: A memoir of a crisis and its aftermath. New York and London: W. W. Norton & Company.

    Google Scholar 

  4. Bernanke, B. S., & Woodford, M. (1997). Inflation forecast and monetary policy. Journal of Money, Credit and Banking, 29(4 (November, Part 2)), 653–684.

    Article  Google Scholar 

  5. Cachanosky, N. (2010). The endogenous stability of free banking: Crisis as an exogenous phenomenon. New Perspectives on Political Economy, 6(1), 31–48.

    Google Scholar 

  6. Cachanosky, N. (2012). The law of National Guaranteed Banks in Argentina, 1887-1890: Free-banking failure or regulatory failure? The Independent Review, 16(4), 569–590.

    Google Scholar 

  7. Cachanosky, N. (2014). Hayek’s rule, NGDP targeting, and the productivity norm: Theory and application. Journal of Stock & Forex Trading, 03(02).

  8. Cachanosky, N. (2017). Austrian economics, market process, and the EVA® framework. Journal of Business Valuation and Economic Loss Analysis, 12(s1).

  9. Cachanosky, N. (2018). Monetary equilibrium and nominal income targeting. London and New York: Routledge.

    Google Scholar 

  10. Cachanosky, N., & Salter, A. W. (2017). The view from Vienna: An analysis of the renewed interest in the Mises-Hayek theory of the business cycle. The Review of Austrian Economics, 30(2), 169–192.

    Article  Google Scholar 

  11. Diamond, D. W., & Dybvig, P. H. (1983). Bank runs, deposit insurance, and liquidity. The Journal of Political Economy, 91(3), 401–419.

    Article  Google Scholar 

  12. Dowd, K. (1992a). Models of banking instability: A partial review of the literature. Journal of Economic Surveys, 6(2), 107–132.

    Article  Google Scholar 

  13. Dowd, K. (1992b). The experience of free banking. London and New York: Routledge.

    Google Scholar 

  14. Dowd, K. (2015). Free banking. In P. J. Boettke & C. J. Coyne (Eds.), The Oxford handbook of austrian economics (pp. 213–246). Oxford: Oxford University Press.

  15. Dutkowsky, D. H., & VanHoose, D. D. (2017). Interest on reserves, regime shifts, and bank behavior. Journal of Economics and Business, 91, 1–15.

    Article  Google Scholar 

  16. Friedman, M. (1947). Lerner on the economics of control. The Journal of Political Economy, 55(5), 405–416.

    Article  Google Scholar 

  17. Fuster, A., Laibson, D., & Mendel, B. (2010). Natural expectations and macroeconomic fluctuations. Journal of Economic Perspectives, 24(4), 67–84.

    Article  Google Scholar 

  18. Garrison, R. W. (1986). From Lachmann to Lucas: On institutions, expectations, and equilibrating tendencies. In I. M. Kirzner (Ed.), Subjectivism, intelligibility and economic understanding (pp. 87–101). New York and London: New York University Press and Macmillan Co..

    Google Scholar 

  19. Hayek, F. A. (1948). Individualism and economic order (1958th ed.). Chicago: The University of Chicago Press.

    Google Scholar 

  20. Hayek, F. A. (1976). Denationalisation of money (2007th ed.). London: The Institute of Economic Affairs.

    Google Scholar 

  21. Hayek, F. A. (1978). New studies in philosophy, politics, economics and the history of ideas. Chicago: The University of Chicago Press.

    Google Scholar 

  22. Hendrickson, J. R. (2017). Interest on reserves, settlement, and the effectiveness of monetary policy. Journal of Macroeconomics, 54, 208–216.

    Article  Google Scholar 

  23. Hoffmann, A. (2014). Zero-interest rate policy and unintended consequences in emerging markets. SSRN Electronic Journal.

  24. Hoffmann, A., & Cachanosky, N. (2018). Unintended consequences of ECB policies in Europe. In A. Kroon, Godart van-der & P. Vonlanthen (Eds.), Banking and monetary policy from the perspective of Austrian economics (pp. 103–126). Cham: Springer International Publishing.

    Google Scholar 

  25. Hogan, T. L. (2012). Competition in currency. Policy Analysis, 698, 1–53.

    Google Scholar 

  26. Hogan, T. L. (2018). Bank lending and interest on excess reserves. Houston.

  27. Hogan, T. L., Le, L., & Salter, A. W. (2015). Ben Bernanke and Bagehot’s Rule. Journal of Money, Credit and Banking, 47(2–3), 333–348.

    Article  Google Scholar 

  28. Hummel, J. R. (2011). Ben Bernanke versus Milton Friedman. The Federal Reserve’s emergence as the U.S. Economy’s central planner. The Independent Review, 15(4), 485–518.

    Google Scholar 

  29. Kirzner, I. M. (1973). Competition and entrepreneurship. Chicago: The University of Chicago Press.

    Google Scholar 

  30. Kirzner, I. M. (1997). Entrepreneurial discovery and the competitive market process: An Austrian approach. Journal of Economic Literature, 35(1), 60–85.

    Google Scholar 

  31. Koppl, R. G. (2002). Big players and the economic theory of expectations. New York: Palgrave Macmillan.

    Google Scholar 

  32. Lucas, R. E. (1976). Econometric policy evaluation: A critique. In K. Brunner & A. H. Meltzer (Eds.), The Phillips curve and labor markets (Carnegie-Rochester conference series on public policy). New York: American Elsevier.

    Google Scholar 

  33. Luther, W. J. (2013). Friedman versus Hayek on private outside monies: New evidence for the debate. Economic Affairs, 33(1), 127–135.

    Article  Google Scholar 

  34. McCallum, B. T. (2011). Nominal NGDP targeting. Shadow Open Market Committee.

  35. Nordhaus, W. D. (1975). The Political Business Cycle. Review of Economic Studies. 42 (April) 169–90.

    Article  Google Scholar 

  36. Rothbard, M. N. (1960). The politics of political economists: Comment. Quarterly Journal of Economics, 74(4), 659–665.

    Article  Google Scholar 

  37. Salter, A. W. (2013). Not all NGDP is created equal: A critique of market monetarism. Journal of Private Enterprise, XXIX(1), 41–52.

    Google Scholar 

  38. Salter, A. W., & Smith, D. J. (2017). What you don’t know can hurt you: Knowledge problems in monetary policy. Contemporary Economic Policy, 35(3), 505–517.

    Article  Google Scholar 

  39. Salter, A. W., & Tarko, V. (2018). Governing the banking system: An assessment of resilience based on Elinor Ostrom’s design principles. SSRN Electronic Journal.

  40. Salter, A. W., & Young, A. T. (2018). A theory of self-enforcing monetary constitutions with reference to the Suffolk system, 182551858. SSRN Electronic Journal.

  41. Sechrest, L. J. (1993). Free banking. Theory, history, and a laissez-faire model (2008th ed.). Auburn: The Ludwig von Mises Institute.

    Google Scholar 

  42. Selgin, G. A. (1988). The theory of free banking. Lanham: CATO Institute and Rowman & Littlefield.

    Google Scholar 

  43. Selgin, G. A. (1996). Bank deregulation and monetary order (2002nd ed.). New York: Routledge.

    Google Scholar 

  44. Selgin, G. A. (1997). Less than zero. London: The Institute of Economic Affairs.

    Google Scholar 

  45. Selgin, G. A. (2018). Floored!: How a misguided fed experiment deepened and prolonged the great recession. Washington D.C: Cato Institute.

    Google Scholar 

  46. Selgin, G. A., & White, L. H. (1994). Monetary reform and the redemption of National Bank Notes, 1863-1913. The Business History Review, 68(2), 205–243.

    Article  Google Scholar 

  47. Selgin, G. A., Lastrapes, W. D., & White, L. H. (2012). Has the fed been a failure? Journal of Macroeconomics, 34(3), 569–596.

    Article  Google Scholar 

  48. Selgin, G. A., Beckworth, D., & Bahadir, B. (2015). The productivity gap: Monetary policy, the subprime boom, and the post-2001 productivity surge. Journal of Policy Modeling, 37(2), 189–207.

    Article  Google Scholar 

  49. Sumner, S. (1989). Uing futures instrument prices to target nominal income. Bulletin of Economic Research, 41(2), 157–162.

    Article  Google Scholar 

  50. Sumner, S. (2012). The case for nominal GDP targeting. Arlington, Virginia: Mercatus Research.

  51. Sumner, S. (2013). A Market-driven nominal GDP targeting regime Arlington, Virginia: Mercatus Research.

  52. von Mises, L. (1949). Human action (1996th ed.). Irvington-on-Hudson: The Foundation for Economic Education.

  53. Walsh, C. E. (2009). Inflation targeting: What have we learned? International Finance, 12(2), 195–233.

    Article  Google Scholar 

  54. White, L. H. (1984). Free banking in Britain. Theory, experience and debate, 1800–1845 (1995th ed.). London: The Institute of Economic Affairs.

    Google Scholar 

  55. White, L. H. (1989). Competition and currency. New York and London: New York University Press.

    Google Scholar 

  56. White, L. H. (1999). The Theory of Monetary Institutions. Chapter 9. Oxford: Basil Blackwell.

Download references

Author information



Corresponding author

Correspondence to Nicolás Cachanosky.

Additional information

Publisher’s note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Cachanosky, N., Salter, A.W. The super-alertness of central banks. Rev Austrian Econ 33, 187–200 (2020).

Download citation


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

JEL classification

  • B53
  • D80
  • E50