Federal State Institution of Higher Professional Education

Saint-Petersburg University
Graduate School of Management
Department of Public Administration

Assignment №2
Analysis of the Monetary Aggregates in Switzerland

Made by
the 1st year students of bachelor program,
group MM,
Shershneva Varvara
Ttikkou Katerina

Lecturer
Victoria V. Tikhonova

Saint-Petersburg
2016
Switzerland

Switzerland is a small yet highly-developed country in Western-Central Europe. It is a

home to approximately eight million people of different nationalities, mainly French, Italian,
German and Romanian, most of whom live in Geneva and Zurich – two global cities and economic
centres of the country. Switzerland has the eighth-highest per capita gross domestic
product according to the International Monetary Fund. Switzerland ranks at or near the top globally
in several metrics of national performance, including government transparency, civil liberties,
quality of life, economic competitiveness, and human development. Being considered by many as
one of the safest countries in the world, it has not been in a state of war internationally since 1815.
Switzerland is a founding member of the European Free Trade Association; however, it is not a
part of the European Union or the European Economic Area.
Switzerland is believed to be the safest and most stable economy in the world. Long-term
monetary security and political stability attract investors from all over the globe, who in turn create
a steady flow of foreign investments. Because of the country's small size and high labor
specialization, industry and trade are the keys to Switzerland's economic livelihood. Switzerland
has achieved one of the highest per capita incomes in the world with low unemployment rates and
a balanced budget.
Banking sector plays an important role in the Swiss economy. In 2015, banks represented
53.3% of the total value added – 5.12% of the country's GDP. The value of the Swiss franc (CHF)
has been relatively stable compared with that of other currencies. The following research intends
to analyze the monetary system of Switzerland regarding the years 2005-2010 by looking at its
monetary base, money supply and money multiplier.

Monetary base

To start with the definitions, monetary base is the total amount of currency that is circulated
in the hands of the public added to the sight deposit accounts of domestic banks.
It can also be defined as a component of a country’s money supply and it refers strictly to
highly liquid funds including notes, coins and current bank deposits.
One significant feature of the monetary base is that unlike money supply or the multiplier
it can be directly influenced by central banks through conducting open market transactions: the
buying and selling of government bonds, through manipulating interest rates, or through setting
reserve requirements.
Money supply

Another monetary aggregate is money supply – the total amount of monetary

assets available in an economy at a specific time. Being also referred to as money stock, it includes
safe assets as for example cash, coins and balances held in checking and saving accounts that
businesses, organizations and individuals can use in terms of their payments or hold as short-term
investments. The government agencies or central banks use this indicator in order to measures the
number of monetary assets that are available in the economy. It is an important metric for the
macroeconomics science, because it can dictate inflation and interest rates. In order to measure the
money supply, economists use all the elements that are included in the M1, such as cash and
checking deposits, as well “near money” which refers to saving deposits, money markets
securities, mutual funds and other time deposits, all these combined is called the M2 (measure of
money supply). It is widely used to analyze and predict inflation.

Money multiplier

Money multiplier is defined as the amount of money the banking system generates with
each unit of reserves. What determines the size of money multiplier actually depends on the
percentage of deposits that banks are required to hold as reserves. In addition, it is the number
which shows by how much the money supply increases when the monetary base is increased by
$1.
All numbers are in CHF millions

The graphs

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Monetary base

Fig. 1. Monetary base (Seasonally adjusted) SOURCE: OECD DATABASE

Figure 1 illustrates the changes in the monetary base in Switzerland for the five-year period
from 2005 to 2010. Before the world financial crisis, the amount of money in circulation (also
known as M1) and bank reserves have been growing quite steadily on average at 0,3% every
month, starting off at CHF 42,877 at the beginning of the period and reaching CHF 46,512 at
September, 2008. As the crisis progressed, Swiss central bank (SNB) was forced to increase the
monetary base so it skyrocketed to CHF 117,615 in less than a year (153% growth). However, it
had almost halved by February, 2010, totaling in CHF 85,157, just before reaching its peak in
May, 2010 at 128,562 which is three times above its initial size. From that point on the monetary
base started going down and by the end of 2010 descended at CHF 72,156. By the end of the year
2008, cash has regained its significance as a store of value, fact that caused the impressive shift on
monetary base. Key factor in terms of demand for banknotes was the continuous low level of
interest rate, but also the financial market and debt crisis played their role in order to help to render
cash holding more attractive. Moreover, further monetary policy continued to be desirable, in
particular because of the persistent strengthening in Swiss franc due to sustained safe-haven
pressures. The appreciation added considerable downward pressure on Swiss consumer prices
despite the low interest rate level. In order to prevent further appreciation and relatively small and
short-lived bond purchase program, SNB adopted a number of uncommon policies which included
foreign exchange interventions. The bond purchase program was discontinued by the end of 2009,
and foreign exchange interventions were officially discontinued in the summer of 2010. As for
2010, these foreign exchange interventions had resulted in a substantial expansion of central bank
reserves and as followed a large part of those were gradually absorbed through reserve repo-
operations and through the sale of short-term central bank bills. During the financial crisis 2007-
2008, the Swiss franc was led to a sharp appreciation. This appreciation led to a tightening of
monetary conditions and induces deflationary threat. However, the bond market in Switzerland is
very limited, so that bond purchases on a large scale are not feasible. Therefore, the SNB has
conducted unsterilized foreign exchange interventions to a large extent, which lead to depreciation
and the reasons were that the supply of domestic currency increases and at the same time also
demand for the foreign currency increases as well, by purchasing foreign currency dominated
assets. The depreciation effect of the Swiss franc, caused but this mechanism, should increase
inflation through the exchange rate channel. Although, the weaker franc made Swiss products
more affordable increasing Switzerland’s competitiveness and stimulating exports.

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Money supply

Fig. 2. Money Supply SOURCE: OECD DATABASE

Figure 2 illustrates the changes in money supply. With growing monetary base and fixed
required reserved ratio of 2,5% at the beginning of the period, declining money supply may be a
result of investment contraction (banks start to give out loans less freely) due to anticipation of the
housing bubble soon burst on the US sub-prime mortgage market or a result of the central bank
policy oriented at maintaining a stable level of inflation.
 In September, 2009 situation changed with money supply shooting up and keeping its
growth rate up until the end of the period. At the beginning of 2009 M3 which also includes large
time deposits was rising with an average of 7.9% per year, while before 2009 it was 3% per year
and the bank started lending to the private sector more in comparison to the previous years’
statistics, especially at 2005. And since 2009, Switzerland made the decision to invest a bigger
part of the persisting current account surpluses into real estate taking always into consideration the
risks and low incomes from global investments. During the year 2010, SNB removed the euro
floors and that was the major reason that caused a slowing in credit growth.

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12

11

10

Money multiplier

Fig. 3. Money multiplier SOURCE: OECD DATABASE

Figure 3 shows the money multiplier for the money supply measure known as M2. As it
has been mentioned earlier in this report, Swiss banks are responsible for 53.3% of the total value
added in the country, which means they actively give out loans and accept deposits. That is why
the multiplier in Switzerland is relatively high comparing to the ones of other countries: for
instance, US multiplier during the same period has never gone above 10, Russian multiplier has
kept below 4. However, Swiss money multiplier started off at its peek at the beginning of 2005
(12,04) and then continuously dropped hitting a trough during the global financial crisis in April,
2009 (5,13). As the economy started to recover, so did the multiplier – by almost reaching the
mark of 10 points at the end of 2010. In late 2008 we see a huge decline, mainly due to the large
change in the reserves-to-deposits ratio, reflecting the sizeable accumulation of central bank
reserves.
Changes in monetary aggregates

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Monetary base (left) Money supply (left) Money multiplier (right)

Fig. 4. Changes in indicators SOURCE: OECD DATABASE

Figure 4 gives a deeper insight into the processes taking place in the Swiss economy from
2005 to 2010. As the money multiplier had been falling quite substantially from the beginning of
the period, SNB had to keep money supply stable by increasing the monetary base. However, the
positive effect of this policy does not become evident until April, 2009 when the multiplier drops
sharply by 4,31 points (comparing to seven months ago) and the monetary base rises by 37%
during the same period. Every time the multiplier starts to grow, the central bank responds by the
reduction in the monetary base and therefore it prevents the country from having excess money
which may in turn lead to higher rates of inflation
Such policy proved to be successful at stabilizing economy and launching its recovery not
only in Switzerland but in other countries as well, including the USA where it had initially
originated.
REFERENCES

Mankiw, N. Gregory. Taylor, M. P. Macroeconomics. Cengage Learning, 2011.

O'Brien, Yueh-Yun C. "Reserve requirement systems in OECD countries." (2007).
The Telegraph. Financial crisis: Why the Swiss economy is still as safe as – er – a Swiss
bank. URL: http://www.telegraph.co.uk/finance/financialcrisis/3198667/Financial-crisis-Why-
the-Swiss-economy-is-still-as-safe-as-er-a-Swiss-bank.html/
Newsweek. How the Swiss are beating the financial crisis. URL:
http://europe.newsweek.com/how-swiss-are-beating-financial-crisis-83429?rm=eu/
OECD Database
Swiss National Bank website. URL:
https://www.snb.ch/en/iabout/monpol/monstat/id/monpol_monstat
Federal Reserve Bank of San Francisco URL: http://www.frbsf.org/economic-
research/files/wp2014-18.pdf/
Universitat Basel URL:
https://www.unibas.ch/fileadmin/wwz/redaktion/witheo/personen/aleks/Master_Thesis_Josipa_
Markovic.pdf/
European Central Bank URL:
https://www.ecb.europa.eu/pub/pdf/other/art1_mb201110en_pp63-79en.pdf/