Abstract
This paper argues that central banks could control consumer price inflation better by injecting money through lump-sum transfers to citizens, rather than by manipulating the credit market and interest rates. Lump-sum monetary transfers lead to less intersectoral distortion and less intertemporal discoordination than measures aimed at stimulating the credit market. They allow central banks to target inflation without building up financial imbalances.
The views expressed in this paper are those of the author and do not necessarily reflect those of the Swiss National Bank.
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Notes
- 1.
See McLeay et al. (2014) for a description of money creation in the fractional reserve banking system.
- 2.
See Laidler (2004) for a monetarist view on Wicksell and Woodford.
- 3.
Money is defined as the common medium of exchange and consists of currency and currency substitutes in circulation. Currency is defined as outside money, monetary base or central bank money. Currency can be redeemable in precious metal or unredeemable if it is a fiat currency. Currency substitutes are redeemable in currency (claims issued by commercial banks to pay currency on demand) and are a synonym of inside money, monetary aggregates or bank deposits.
- 4.
Note, however, that changes in the stock of currency itself (gold) would not take place through the granting of credit but through the purchase and sale of gold.
- 5.
The controversy between the Banking School and the Currency School also dealt with other issues, such as the equivalence between bank notes and bank deposits or the role of precious metal in the determination of prices. We focus in this paper on the economic consequences of the relationship between money and credit, which remain of the utmost importance in today’s debate.
- 6.
See Ledoit (2011) for a formal model of the Cantillon effect.
- 7.
See Huelsmann (2014) for an essay on the distributive effect of monetary policy.
- 8.
- 9.
See Chap. 20 on ‘Interest, credit expansion, and the trade cycle’ in Mises (1949), Chap. 4 on ‘Price expectations, monetary disturbances, and malinvestments’ in Hayek (1939), or Chap. 5 on ‘Bank credit expansion and its effects on the economic system’ in Huerta de Soto (2009) for an exposition of the Austrian business cycle theory.
- 10.
- 11.
This also allows to understand economically the trade-off between inflation and default.
- 12.
This section is based on Baeriswyl (2015).
- 13.
Note that this withdrawal process would then affect the credit market.
- 14.
Unconventional measures taken by central banks, such as quantitative easing, may share some fiscal aspects because the central bank purchases government bonds or because taxpayer money is put at risk.
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Acknowledgements
The author thanks Katrin Assenmacher, Rafael Greminger, Hans-UeliHunziker, Carlos Lenz, Jonas Meuli, Pierre Monnin, Samuel Reynard, participants at the symposium held in honor of Professor Gerhard Illing in Munich, and especially Frank Heinemann, the editor, for their useful comments.
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Baeriswyl, R. (2017). The Case for the Separation of Money and Credit. In: Heinemann, F., Klüh, U., Watzka, S. (eds) Monetary Policy, Financial Crises, and the Macroeconomy. Springer, Cham. https://doi.org/10.1007/978-3-319-56261-2_6
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