Document Type
Article
Language
eng
Format of Original
22 p.
Publication Date
2006
Publisher
The Indian Econometric Society
Source Publication
Journal of Quantitative Economics
Source ISSN
0971-1554
Abstract
This paper investigates the substitutability between money and near-money assets during the period 1976 to 1996 in Switzerland. Financial developments have made a variety of instruments available to store wealth and conduct economic transactions. These developments have generated a "near money" component in households' and businesses' portfolio balances. It is important to evaluate the effect of "near-money" on money demand and the effectiveness of monetary policy. Towards this goal, five monetary assets: currency and demand deposits at commercial banks, demand deposits with the postal system, deposits on transaction accounts with banks, savings deposits and time deposits are considered. We evaluate the degree of substitutability among these assets using the Morishima elasticity. Results show that various monetary assets substitute for one another. Consistent with a high degree of diversification, the Morishima elasticity is significantly larger when adjustment takes place in the price of a relatively broader monetary asset as compared with a narrower one. Targeting a broad monetary aggregate captures a variety of assets that contribute to liquidity and aggregate demand, enhancing the effectiveness of monetary policy. Nonetheless, high elasticity of substitution between monetary assets has made it increasingly difficult to target money demand via changes in the interest rate. As a result, in 1999 the Swiss National Bank abandoned monetary targeting in favor of an expected inflation target.
Recommended Citation
Sharma, Subhash C.; Kandil, Magda; Chowdhury, Abdur; and Parker, Tammy, "Substitution between Money and Near Monies in Switzerland" (2006). Economics Faculty Research and Publications. 126.
https://epublications.marquette.edu/econ_fac/126
Comments
Published version. Journal of Quantitative Economics, Vol. 4, No. 1 (2006): 133-154. Publisher Link. © 2006 The Indian Econometric Society.
Abdur R. Chowdhury was affiliated with the United Nations Economic Commission for Europe at the time of publication.