FRFBFinite-Rate Feedback
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This is perhaps the most crucial point determining whether a FRFB system a la Selgin is self-destabilizing or not.
However, the FRFB system now has more reserves and may expand credit not sustained by an increase in real savings.
We must also take into account that due to the bank multiplier and depending on the reserve ratio, the FRFB system will create and lend out more money than has merely changed its location.
This case is omitted, incidentally, from Selgin's analysis as the demand to hold outside money is assumed (though Selgin rather believes it is largely proved) to be stable in the mature FRFB system.
The second scenario involves, at least in a FRFB system, an expansion of credit in excess of the original deposit.
While Selgin is quite correct that the FRFB system can detect when an individual has increased his demand for bank liabilities, it cannot know exactly when that individual will spend his higher cash balance.
What is the reaction of the FRFB system to such a scenario?
Yet, a FRFB system responds to increases in the nominal demand for bank liabilities.
We originally argued that the market process itself does satisfy an increased demand to hold real cash balances, and does so more directly than a FRFB system.
He subscribes to the neoclassical equation of exchange and bases his theory on it: FRFB stabilizes MV.
Another field where Selgin ignores our arguments is the stability of the FRFB system.
We (2011a, 47-50) proposed three scenarios through which a FRFB system may expand credit unbacked by real savings.