Has the WSJ Embraced Monetary Equilibrium?

Over the past few years, David Beckworth and I have stressed the importance of the concept of monetary equilibrium. When actual money balances differ from desired money balances, this causes fluctuations in spending and as a result nominal income. This is significant because in the short run, such fluctuations also have real effects. The implication is that increases in the demand for money should be offset with increases in the supply of money from the central bank.

This morning the Wall Street Journal editorial board embraced this concept (for Switzerland):

The Swiss National Bank’s announcement Tuesday that it would buy “unlimited quantities” of euros to keep the franc-euro exchange rate above 1.20 is a dramatic and helpful move amid the continuing euro crisis.

Switzerland is a small economy, but since 2008 its franc has become the shelter currency of choice for skittish investors. With debt crises on both sides of the Atlantic and Japan on its sixth prime minister in five years, Switzerland looks like the last sane man in the room.

But such popularity has driven up the purchasing power of the franc abroad while making Swiss exports more expensive. Exporters in particular have been howling about the franc’s appreciation. The Swiss central bank clearly had these pressures in mind in deciding to impose the exchange-rate ceiling.


But throwing a bone to exporters is not the most important reason for the central bank to intervene. Central banks are the monopoly suppliers of the commodity known as money. When a currency like the Swiss franc appreciates rapidly, the market is sending a signal that not enough francs are being printed to meet demand.

The modern central banker’s weapon of choice for combatting a currency’s rapid rise in value is a “sterilized” intervention—in which a bank sells its currency against another, but then sells bonds or other instruments so the amount of money in circulation doesn’t change. This may have a psychological effect on speculators but does nothing to change the supply-demand imbalance.

The Swiss National Bank, by contrast, seems to be buying euros with francs without offsetting the purchases elsewhere. In other words, it seems prepared at last to meet the increased demand with additional supply. This need not be inflationary for Switzerland. Should demand for francs recede in the future, the central bank can easily mop up the additional money it’s creating now by selling the foreign-exchange it’s currently buying to keep the franc steady.

I have previously written about these concepts here and here. It is nice to see the WSJ editorial board coming around.

8 responses to “Has the WSJ Embraced Monetary Equilibrium?

  1. Pingback: The “William Tell strategy”: Aim and shoot | Historinhas

  2. If only they would apply this analysis to the U.S.!

  3. Lars Christensen

    This is truly bizarre!! The WSJ thinks it is reasonable to increase the money base to respond to an increase in money demand, but they bash everybody who suggest the same for the US…it is incredible that the Journal editorial does not even realise this….

  4. Even more bizarre. The left hand doesn´t know there´s a right hand at the Journal:

  5. It seems to me that people have trouble grasping the connection between aggregate nominal expenditure and the supply of and demand for money. A lot of people look at the massive increase in the monetary base and assume that an unsatisfied demand for money just can’t be the problem. The argument is that something else must be going on. Monetarists need to push the line that aggregate nominal expenditure is the proper number to be looking at to tell whether money demand has been satisfied — not changes the gross amount of money.

  6. Lee, I tend to agree, but I also think that the rhetoric of the monetarist bloggers should be less activist in the sense of for example talking about the need to “stimulate” growth and to “ease” monetary policy etc. Maybe the old allies on the right could understand better if it again and again is explained that it is not about stimulus, but rather about ensure the the “passive” tightening of monetary condition that result from increased money demand (the drop in velocity) is met by a increase in the money supply. Obviously that is the same as saying that the NGDP level path should be the target as you suggest.

    PS I am mostly talking about Scott Sumner rather than Josh or David…Scott knows that this is my view…

  7. By the way the effort might be easier if some sexy measure for “net money supply growth” was constructed…

  8. Pingback: TheMoneyIllusion » Further thoughts on Switzerland

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