Working Paper: CEPR ID: DP12349
Authors: Philippe Bacchetta
Abstract: The Sovereign Money Initiative will be submitted to the Swiss people in 2018. This paper reviews the arguments behind the initiative anddiscusses its potential impact. I argue that several arguments are inconsistent with empirical evidence or with economic logic. In particular, controlling sight deposits neither stabilizes credit nor avoids financial crises. Also, assuming that deposits at the central bank are not a liability has implications for fiscal and monetary policy; and Benes and Kumhof (2012) do not provide support for the reform as they do not analyze the proposed Swiss monetary reform and their closed-economy model does not fit the Swiss economy. Then, using a simple model with monpolistically competitive banks, the paper assesses quantitatively the impact of removing sight deposits from commercial banks balance sheets. Even though there is a gain for the state, the overall impact is negative, especially because depositors would face a negative return. Moreover, the initiative goes much beyond what would be the equivalent of full reserve requirement and would impose severe constraints on monetary policy; it would weaken financial stability rather then reinforce it; and it would threaten the trust in the Swissmonetary system. Finally, there is high uncertainty both on the details of the reform and on its impact.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| controlling sight deposits (E58) | does not stabilize credit (E51) |
| controlling sight deposits (E58) | does not prevent financial crises (G01) |
| controlling sight deposits (E58) | may weaken financial stability (F65) |
| changes in money supply (E51) | changes in credit (E51) |
| Sovereign Money Initiative (E42) | negative overall economic impacts (F69) |
| negative overall economic impacts (F69) | depositors face negative return on deposits (G21) |
| Sovereign Money Initiative (E42) | losses incurred by depositors outweigh gains from increased seigniorage (F65) |