Reciprocal Exchange and Macroeconomic Stability: Switzerland

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Reciprocal Exchange and Macroeconomic Stability
Switzerlands Wirtschaftsring (Cercle Économique)
James Stodder, (Ph.D., Economics, Yale
1990) Lally School of Management
Technology Rensselaer Polytechnic Institute at
Hartford Hartford, Connecticut, USA
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Main Idea of Microfinance
Problem of Credit for Investments
Complimentary to Human Capital
Recognized by Economists at least since John
Stuart Mill
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But better Access to Credit is notonly a
Problem of
Microeconomic Efficiency, and More Equality
of Opportunity
It can also be a Problem of Macroeconomic
Stability
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Local Currencies arise in every recession e.g.,
BerkShares
http//www.berkshares.org/heroes/index.htm
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Sufficient Money Needed to Effect All Improving
Transactions

• Figure 1 The Failure of Double-Coincidence

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The Swiss WIR-Bank

• Founded in 1934, inspired by the ideas of the
  German-Argentine economist and international
  trader Silvio Gesell (1862-1930).
• Wirtschaftsring Cercle Économique
• Also, WIR WE sense of Community
• Restricted to Small and Medium Business.

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Employees and Owners in Small to Medium Firms
can be shown to have

• Less Formal Education / Qualifications
• Higher Risk of Layoffs Bankruptcy
• Less Access to Bank Credit
• More Self-Financing, and thus,
• Less Ability to Diversify to Mitigate Risk
• - WINTER-EBMER, Rudolf, Josef ZWEIMÜLLER (1999)
  Firm Size Wage Differentials
• in Switzerland Evidence from Job Changers,
  American Economic Review

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In 2003, WIR-Bank had 77,000 Participants
Turnover of 1.7 Billion SFr (US 1.28 B.)

• WIR clients maintain two accounts, one in Swiss
  Francs (SFr), the other in WIR.
• WIR accounts can be used to clear (in WIR) trades
  only with other WIR clients.
• Since 1973, WIR credits not openly traded for SFr
  (although this may still happen)

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Long-term Correlation with Unemployment
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Did WIR de-link from M2 around 1973?
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WIR-Credits could not be Discounted for SFr.
after 1973

• The public perception was that WIR money was
  of lesser quality, since it was offered publicly
  at large discounts Discounting had been
  tolerated based on the theory that it created
  additional turnover and facilitated members
  ability to ride out periodic currency-liquidity
  bottlenecks.
• - (WIR in the Swiss National Economy), Prof.
  Tobias Studer, University of Basel (1998)

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My paper tests this theory

• Error Correction Model (ECM) to distinguish
  long-term (secular) from short-term
  (cyclical) effect.
• I track effects of Unemployment and GDP upon WIR
  Turnover
• I find a Structural Break at 1973
• I find strong counter-cyclical effects, but
  mostly pre-1973

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Simple Error Correction Model

• D(ms) a (mst Qt)
• long-term effects
• ?t ßt (D(ms (-t))
• ?t ?t (D(Q(-t))
• Short-term (cyclical) effects

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Under normal conditions, Q Q1

• But in conditions of recession, mp is
  insufficient, and
• Q Qp Qs
• This implies that changes in mp Granger cause ms
  and that the two are negatively correlated.

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Figure 3 Granger Causality Relationships --
WIR, Swiss Aggregates, 1950-2003
Note Numbers are P-values on the null hypothesis
of no Granger causality shown by directional
arrow between variables. Solid arrows indicate
that this null is rejected at 5 percent level,
with thickness proportional to significance.
Broken arrows show insignificance.
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Table 4 Pre-1973, Counter-Cyclical link GDP ?
WIR-Turnover
Sample 1952-1972 Sample 1973-2003
D(LnGDP_Ma2(-1)) -1.9444 -1.4894
  -3.241 -1.884
D(LnGDP_Ma2(-2)) -0.5876 2.5289
-1.035 3.116
Adjusted R2 0.935 0.723
t-stats in p lt 0.01, p lt 0.05, p lt 0.10 o p lt 0.15 t-stats in p lt 0.01, p lt 0.05, p lt 0.10 o p lt 0.15 t-stats in p lt 0.01, p lt 0.05, p lt 0.10 o p lt 0.15
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Table 5 Pre-1973, Counter-Cyclical link
Unemployment ? WIR-Turnover
Sample 1952-1972 Sample 1973-2003
D(LnUE_Ma2(-1)) 0.1038 0.0430
  2.717 1.999
D(LnUE_Ma2(-2)) 0.0482 -0.0527
1.379 -2.472
Adjusted R2 0.921 0.711
t-stats in p lt 0.01, p lt 0.05, p lt 0.10 o p lt 0.15 t-stats in p lt 0.01, p lt 0.05, p lt 0.10 o p lt 0.15 t-stats in p lt 0.01, p lt 0.05, p lt 0.10 o p lt 0.15
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Is WIR TurnoverMore Counter-Cyclical than
National Money Credit?

• Comparable specifications show
• No counter-cyclical effects for Swiss Money
  Supply (M2).
• No counter-cyclical effects for Swiss Banking
  Credit as a whole.
• No Structural Break at 1973 for either one.

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The Question of Inflation

• The best current monetary policy cannot cure all
  recessions without accelerating inflation.
• Therefore, Central Banks are often forced to
  tighten money supply during a recession.
• If a more Micro Monetary Policy can reach
  deeper -- to sectors not reached by traditional
  monetary expansions --
• In providing new credit to these sectors, can it
  do so without new pressure on inflation?

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However, Reaching Deeper

• If WIR Microfinance reaches deeper -- down to
  the Micro-economies of small businesses,
  distressed regions, marginal workers, and
  unemployment
• Perhaps it can also reach deeper into the
  Macroeconomy, down to stabilization measures
  impossible for standard Monetary Policy.

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US Money Supply Too Pro-Cyclical?
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US Interest Rate Controls Too Pro-Cyclical?
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US Macro-Stability Better, Room for Improvement
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66
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http//www.nber.org/cycles.html
Source
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Closing Thoughts

• WIR-type systems may be a form of Micro-Central
  Banking suggested by Micro-Finance.
• Traditional Monetary Policy is subject to the
  Limitations of Aggregation.
• WIR-Type systems control, not national monetary
  aggregates, but credit to specific regions and
  even individual businesses.

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A closing analogy

• As the internet enables Advertisers to move from
  Broadcasting to Point-Casting targeting
  specific customers
• Similarly, WIR-type systems may enable Monetary
  Authorities to move from changing just
  Macro-Credit to also targeting Micro-Credit.
• This can Expand (or Restrict) Credit just where
  it can do the most good (or the most harm)!

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For copies of Slides and/or Paper,
emailstoddj_at_rpi.edu