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IMF (Chicago Plan)

IMF (Chicago Plan)

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Published by Roy Tanner
Global debt forgiveness study, where nations regain sovereign control over their money supply. Theoretically, there would be no more banks runs, and fewer boom-bust credit cycles. Specifically, it means an assault on "fractional reserve banking". If lenders are forced to put up 100pc reserve backing for deposits, they lose the exorbitant privilege of creating money out of thin air.
Global debt forgiveness study, where nations regain sovereign control over their money supply. Theoretically, there would be no more banks runs, and fewer boom-bust credit cycles. Specifically, it means an assault on "fractional reserve banking". If lenders are forced to put up 100pc reserve backing for deposits, they lose the exorbitant privilege of creating money out of thin air.

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Published by: Roy Tanner on Oct 22, 2012
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04/06/2014

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The Chicago Plan Revisited
 Jaromir Benes and Michael Kumhof 
WP/12/202
 
 
© 2012 International Monetary Fund WP/12/ 
202
 
IMF Working Paper
Research Department
The Chicago Plan RevisitedPrepared by Jaromir Benes and Michael Kumhof 
Authorized for distribution by Douglas LaxtonAugust 2012
This Working Paper should not be reported as representing the views of the IMF.
 
The views expressed in this Working Paper are those of the author(s) and do not necessarily representthose of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and arepublished to elicit comments and to further debate.
Abstract
 At the height of the Great Depression a number of leading U.S. economists advanced aproposal for monetary reform that became known as the Chicago Plan. It envisaged theseparation of the monetary and credit functions of the banking system, by requiring 100%reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for thisplan: (1) Much better control of a major source of business cycle fluctuations, suddenincreases and contractions of bank credit and of the supply of bank-created money.(2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt.(4) Dramatic reduction of private debt, as money creation no longer requires simultaneousdebt creation. We study these claims by embedding a comprehensive and carefully calibratedmodel of the banking system in a DSGE model of the U.S. economy. We find support for allfour of Fisher's claims. Furthermore, output gains approach 10 percent, and steady stateinflation can drop to zero without posing problems for the conduct of monetary policy.JEL Classification Numbers: E44, E52, G21Keywords:Chicago Plan; Chicago School of Economics; 100% reserve banking; bank lending; lending risk; private money creation; bank capital adequacy;government debt; private debt; boom-bust cycles.Authors’ E-Mail Addresses:benes@imf.org;mkumhof@imf.org 
 
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Contents
I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4II. The Chicago Plan in the History of Monetary Thought . . . . . . . . . . . . . 12A. Government versus Private Control over Money Issuance . . . . . . . . . 12B. The Chicago Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17III. The Model under the Current Monetary System . . . . . . . . . . . . . . . . . 20A. Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20B. Lending Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24C. Transactions Cost Technologies . . . . . . . . . . . . . . . . . . . . . . . 26D. Equity Ownership and Dividends . . . . . . . . . . . . . . . . . . . . . . 26E. Unconstrained Households . . . . . . . . . . . . . . . . . . . . . . . . . . 27F. Constrained Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28G. Unions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30H. Manufacturers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30I. Capital Goods Producers . . . . . . . . . . . . . . . . . . . . . . . . . . . 31J. Capital Investment Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . 31K. Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321. Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322. Prudential Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323. Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324. Government Budget Constraint . . . . . . . . . . . . . . . . . . . . 33L. Market Clearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33IV. The Model under the Chicago Plan . . . . . . . . . . . . . . . . . . . . . . . . 33A. Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33B. Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36C. Manufacturers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37D. Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 371. Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372. Prudential Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393. Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404. Government Budget Constraint . . . . . . . . . . . . . . . . . . . . 415. Controlling Boom-Bust Cycles - Additional Considerations . . . . . 42V. Calibration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42VI. Transition to the Chicago Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 49VII. Credit Booms and Busts Pre-Transition and Post-Transition . . . . . . . . . . 52VIII. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

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