Morning Must-Read: Willem Buiter: The SNB, the Exchange-Rate Peg, and the Interest-Rate ZLB
…of the exchange rate floor…. The old regime, with or without the additional 50bps cut… was viable and superior to the new regime…. Central banks can live with very large balance sheets… diversify… out of euro forex…. There is no ostensible problem with the central bank having to live with becoming an even larger hedge fund/asset manager or Sovereign Wealth Fund…. It may be that the political scrutiny that would come with an even larger balance sheet… was a source of concern…. But such discomfort would seem to be a small price to pay compared to the cost to the nation of a massively overvalued currency, serious deflation and the resulting harmful effects on the real economy….
The second superior alternative would have been to abolish the effective lower bound on the nominal interest rate…. There is little empirical evidence on demurrage for paper currency…. There are no serious arguments against creating a financial system where nominal policy rates can be set with equal ease at -5% as at +5%…. The ELB can be eliminated… by abolishing currency/cash… checkable deposits… credit cards, debit cards and cash-on-a-chip cards… existing and yet-to-be invented e-money… taxing currency, in the spirit of Gesell (1916)… end the fixed exchange rate, currently set at unity, between SNB deposits and cash… encourage the use of the deposit Franc as the numéraire… for price and wage setting….
The good news is that, apart for the reputational damage suffered by the SNB… much of the damage can be undone. The SNB… [could] restore as much of the status quo ante as possible by restoring a floor to the exchange rate of the CHF and the euro (or to the effective exchange rate of the CHF for some suitable basket of currencies)….
No doubt the euros would be galloping in at any floor that is not well below 1.20 CHF per euro, but Switzerland has many skilled asset managers who could invest the rapidly expanding resources of the SNB in a globally diversified portfolio of nominal and real assets. The second damage-limiting option is to abolish the ELB on nominal interest rates as soon as possible…