reflection on deflation in Switzerland.
"It’s as close to an economic consensus as you can get: Deflation is bad for an economy, and central bankers should avoid it at all costs."
I differ, as does Milton Friedman's "Optimum quantity of money." And my "who's afraid of a little deflation" in... The Wall Street Journal.
"Then there’s Switzerland, whose steady growth and rock-bottom unemployment is chipping away at that wisdom."
"At a time of lively global debate about low inflation and its ill effects, tiny Switzerland—with an economy 4% the size of the U.S.—offers a fascinating counterpoint, with some even pointing to what they call 'good deflation.' ”
Indeed. The 1970s had stagflation. Now we have the opposite, "good deflation." The Phillips curve lives on in "consensus."
Switzerland also is a good case for just how powerless central banks are to do much about it.
I don't think there really is such a thing as monetary policy any more. Money and government bonds are perfect substitutes. At that point, central bank interest rate setting is the same thing as if the Treasury simply decreed the rate it will pay on government debt. When (if) the Fed raises interest on reserves, and Treasury interest goes up similarly, it will be just as if the Treasury announced it will pay 1% on short term debt. (p. 77-78 of Monetary Policy with Interest on Reserves or p. 6-7 ungated here makes this point with equations.)
But you have to be careful when you set a price. If you set the wrong price, you are either overwhelmed or starved with demand.
That's how I read recent events: The Fed talks about raising rates, a sea of foreign capital starts to want to buy US debt at that higher rate. The treasury is not offering an elastic supply -- they're setting both price and quantity. So with the interest rate fixed, the dollar goes up. Then the Fed has to back down. The Fed can't raise rates if it wants to.
Switzerland also taught that lesson when its central bank tried to peg to the Euro and was overwhelmed.