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Recently, the U. S. subprime crisis has shown that a weak collateralization of credits may have massive economic implications, entailing severe perturbations of the international financial system. We focus on central bank lending and try to pin down the quantitative impact of the collateralization of central banks' credits. A questionnaire on national monetary frameworks was used to collect data from central banks. Drawing on these data we derive an index of the quality of eligible assets measuring the minimum requirements for the issue of money by the respective central bank. We provide data for 62 countries and we show that this index has the potential to affect monetary stability as measured by national inflation rates. The existence of a correlation between inflation and the quality of eligible collateral would strongly support fundamental claims of property economics, an economic theory based on a clear cut distinction between property and possession. Property economics emphasizes the role of collateralized lending in explaining the process of money creation and, more generally, the emergence of any economic activity.

The central banking literature regards central bank independence and a transparent monetary policy as best suited to achieve and safeguard monetary stability. The existing empirical literature, however, failed in establishing a solid ground for this consensus. This paper sheds some new light on the empirical evidence on determinants of monetary stability. In addition, it expands the current research agenda by considering a neglected factor: The quality of eligible collateral (QEC). Recently, the U. S. subprime crisis has shown that a weak collateralization of credits may have massive economic implications, entailing severe perturbations of the international financial system. This paper focuses on central bank lending and investigates to what extent the quality of eligible collateral is able to explain inflation employing the first comprehensive dataset to assess the significance of QEC for monetary stability. Data have been collected using an online questionnaire that was answered by central bank officials. For the period 1990 to 2003 and a sample of 62 countries a robust negative and statistically significant correlation between QEC and average inflation is found. This result is robust to the use of control variables from the literature on institutional determinants of monetary stability. These findings have to be regarded as establishing QEC as one pivotal element of a theory of central banking. Collateralisation of the issuance of money and the elimination of financing the government deficit directly via the central bank can be seen as necessary conditions for achieving monetary stability. Good central bank money should be backed by the liable property of creditors to safeguard monetary stability. This finding can be utilized by policy makers especially in less developed and transition countries on their way towards a more stable economic development.

The search for determinants of economic development in this work focuses on the institution of property, whose theoretical foundation is provided by the property economics, founded by Gunnar Heinsohn and Otto Steiger. In the frame of property economics it is the interdependence of property rights, justice and freedom which is the driving force economic activity is based on. In contrary to rules of possession, property rights must be understood as the constituent element of economic activity. Property operations like credit and sales contracts between free proprietors, whose enforceability independent legal institutions have to ensure, make economic operations measurable so that interest and genuine money can arise. The institutional background of a genuine money issue is a modern two-tiered banking system in which one independent central bank and competing commercial banks act as market participants. They have to ensure the ability of money to fulfill contracts on international credit and capital markets. The significant impact of the institution of property for the transformation process is shown by highlighting the case of Slovenia. The Housing Act in particular has created lendable property rights while other property laws resulted in a relatively balanced distribution of property within the Slovenian population. In contrast to other transformation economies selective capital controls hindered foreign direct and portfolio investments. The transformation process in Slovenia shows that not due to a shortage of resources or money countries are underdeveloped. But moreover, without the institution of property a sustainable resource management and a self-sustaining economic development will fail.