Mittwoch, 1. August 2012

Swiss monetary base and money multiplier

The Swiss economy is currently characterized by zero lower bound, deflation risk and negative yields. Both on the money market as well as in the bond market the yields are largely below zero. Investors are paying Swiss government to hold their money.

Monetary base has increased in Switzerland end of June to 273.9 billion CHF, an increase of 57.1 billion CHF compared to previous month. A year ago in June 2011 the monetary base was 74.6 billion CHF. It means an increase of 267.1% within 12 months.

But there is no inflation in Switzerland. Why? If the economy in a liquidity trap, as Paul Krugman explains, in which even zero interest rates aren’t low enough to induce sufficient spending, printing lots of money is not inflationary.

The technical capacity utilization in manufacturing remains below its long-term average. The output gap was in the first quarter -0.7%, compared with -1.0% in the fourth quarter 2011.

The core inflation in Switzerland is negative (minus 1.20%) the 9th month in a row! The forecast of the SNB shows an inflation rate of -0.5% for 2012. For 2013 the SNB is expecting inflation of 0.3% and for 2014 of 0.6%. Consequently in the foreseeable future there is no risk of inflation in Switzerland. The interest rate expectations remain exceptionally low and are in fact in some cases substantially below zero. The yields in the Swiss franc money market continue to be negative. Yesterday it was the 50th auction in a row with a negative yield for money market papers with 3 months duration.

Swiss Money Multiplier, Graph: ACEMAXX-ANALYTICS
Source: SNB

The increase in sight deposits held at the SNB is primarily due to the enforcement of the minimum exchange rate. The money multiplier collapsed in Switzerland in the course of the euro crisis. This means that the money the SNB creates doesn’t set up in the real economy, because the banks hold the increased liquidity as a precaution. That the excess liquidity is hoarded it can be seen in the decreasing velocity of the money.

The broad monetary aggregates show strong growth over the past few months. As the Banks hold large excess reserves, their ability to create loans and money is not restricted by the regulatory minimum reserve requirements.

Swiss Core Inflation, Graph: ACEMAXX-ANALYTICS

Source: SNB

PS: I’m a little bit confused after reading Simons Wren-Lewis blog entry (“Kill the Money Multiplier”) . I’m not sure, whether I get it right. Isn’t it cool to point out to the money multiplier? My first year economic textbook was Dornbusch-Fischer. I guess it is still a good exercise for students and graduates. As Nick Rowe notes, the argument “loan create deposits” is not a heterodox idea”. Is it too wonkish? What am I missing?


Nick Rowe hat gesagt…

"What am I missing?"

Maybe you are not missing anything. If you are missing something, I don't know what it is.

Mark hat gesagt…

Could you please indicate the sources of your data. It does not look professional without sources.

Why do you think that Switzerland is in a liquidity trap when retail sales rise 3.7% YoY and unemployment is at record low of 2.9% ?

Or like Reuters said: A small country, a big hedge fund.

Concerning inflation and referencing sources see this one:



Liquidity trap is a situation in which the nominal interest rate declines against the zero bound and therefore, the monetary policy becomes ineffective. In other words it is an economic condition in which monetary policy cannot be used or fails, because the nominal interest rate cannot drop below zero.

The economy of the US was in the 1930s mostly close to the zero bound. The situation rather occurs when the public expects deflation (instead of inflation). In the 1990s Japan was at the zero bound and experienced a persistent deflation.

My sources are:

Textbook (Econ 101),
SNB Home Page,
Reuters and Bloomberg,
Blogs (like Paul Krugman, Mark Thoma, Nick Rowe, Brad De Long, FT Alphaville etc.).

Gloeschi hat gesagt…

The velocity of money is not an independent economic "force"; it is merely the dependent of monetary base and GDP. But you are on the right path to understand the current impotence of central bankers to stimulate the economy (where is inflation when you "need" it?). I would invite you to read my latest post to this subject: