Swiss Deflation

The Wall Street Journal Mon October xix offers a reflection on deflation inwards Switzerland.

"It’s equally about an economical consensus equally you lot tin get: Deflation is bad for an economy, together with cardinal bankers should avoid it at all costs."

I differ, equally does Milton Friedman's "Optimum quantity of money." And my "who's afraid of a piffling deflation" in... The Wall Street Journal.

"Then there’s Switzerland, whose steady increment together with rock-bottom unemployment is chipping away at that wisdom."

"At a fourth dimension of lively global combat nearly depression inflation together with its sick effects, tiny Switzerland—with an economic scheme 4% the size of the U.S.—offers a fascinating counterpoint, alongside some fifty-fifty pointing to what they telephone band 'good deflation.' ”

Indeed. The 1970s had stagflation. Now nosotros convey the opposite, "good deflation."  The Phillips crease lives on inwards "consensus."

Switzerland besides is a skilful illustration for precisely how powerless cardinal banks are to exercise much nearly it.


I don't intend in that place actually is such a matter equally monetary policy whatsoever more. Money together with regime bonds are perfect substitutes. At that point, cardinal banking concern involvement charge per unit of measurement setting is the same matter equally if the Treasury merely decreed the charge per unit of measurement it volition pay on regime debt. When (if) the Fed raises involvement on reserves, together with Treasury involvement goes upwards similarly, it volition live precisely equally if the Treasury announced it volition pay 1% on curt term debt. (p. 77-78 of Monetary Policy alongside Interest on Reserves or p. 6-7 ungated here makes this betoken alongside equations.)

But you lot convey to live careful when you lot laid a price. If you lot laid the incorrect price, you lot are either overwhelmed or starved alongside demand.

That's how I read recent events: The Fed talks nearly raising rates, a ocean of unusual majuscule starts to desire to purchase U.S.A. debt at that higher rate. The treasury is non offering an elastic render -- they're setting both toll together with quantity. So alongside the involvement charge per unit of measurement fixed, the dollar goes up. Then the Fed has to dorsum down. The Fed can't heighten rates if it wants to.

Switzerland besides taught that lesson when its cardinal banking concern tried to peg to the Euro together with was overwhelmed.