An oligopoly model of free banking: Theory and tests | Zendy

Michael R. Baye | Zendy; Paul De Grauwe | Zendy; Casper G. de Vries | Zendy

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An oligopoly model of free banking: Theory and tests

Author(s) -

Michael R. Baye,

Paul De Grauwe,

Casper G. de Vries

Publication year - 1993

Publication title -

de economist

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 0.209

H-Index - 29

eISSN - 1572-9982

pISSN - 0013-063X

DOI - 10.1007/bf02375169

Subject(s) - circulation (fluid dynamics) , oligopoly , economics , monopoly , monetary economics , money supply , perfect information , keynesian economics , microeconomics , macroeconomics , monetary policy , cournot competition , physics , thermodynamics

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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