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In-Concert Overexpansion and the Precautionary Demand for Bank Reserves

George Selgin
Journal of Money, Credit and Banking
Vol. 33, No. 2, Part 1 (May, 2001), pp. 294-300
DOI: 10.2307/2673887
Stable URL: http://www.jstor.org/stable/2673887
Page Count: 7
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In-Concert Overexpansion and the Precautionary Demand for Bank Reserves
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Abstract

Economists have long believed that, absent any public withdrawals of high-powered money, an unregulated, closed banking system can expand its assets and liabilities without encountering any shortage of reserves so long as its members act in concert. Notwithstanding its popularity, this "in-concert overexpansion" doctrine is inconsistent with standard theories of the precautionary demand for bank reserves. Unless these theories are themselves incorrect, concerns that complete removal of legal restrictions on the competitive supply of bank money must result in an unstable or indeterminate bank-money multiplier are misplaced.

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