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IMF Working Paper Supports Full Reserve Banking

August 24, 2012

In August 2012 the IMF released a working paper supporting the claims made by Irving Fisher for Full reserve banking:

Title:  ‘The Chicago Plan Revisited’

Author/Editor:     Benes, Jaromir ; Kumhof, Michael

Authorized for Distribution:     August 01, 2012

Electronic Access:     Free Full text (PDF file size is 1,114KB).
Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: 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 represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary: At the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation 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 this plan: (1) Much better control of a major source of business cycle fluctuations, sudden increases 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 simultaneous debt creation. We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher’s claims. Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy.

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Series:     Working Paper No. 12/202
downloadable at: http://www.imf.org/external/pubs/cat/longres.aspx?sk=26178.0

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