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Evan Soltas Says That Swiss Monetary Policy Is in Need of More Attention: Monday Focus (December 30, 2013)

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That upstart stripling whippersnapper Evan Soltas poses macroeconomists an interesting puzzle:

Evan Soltas: How Did We Miss the Swiss?:

We have ignored another economy [besides Japan] that has spent decades with extraordinarily and persistently low nominal growth and overnight interest rates: Switzerland... [where] NGDP growth has averaged 2.7 percent per year and CPI inflation has averaged 0.7 percent per year.... The Swiss National Bank's monetary policy instrument, the 3-month LIBOR in Swiss francs... hasn't been lifted above 3.5 percent in... fifteen years... has been perpetually at or just above the zero lower bound.

The last time I wrote about Switzerland, in fact, I was describing its effort to stop outright deflation by placing a ceiling on the foreign-exchange value of the currency. That effort has succeeded, and deflation is over, but there's no sign that the bank is going to be able to lift its policy rate soon.

It's funny that American economists reach for Japan to study an economy with ultralow interest rates and weak nominal growth. Switzerland is more like the U.S. than Japan could ever be. Switzerland has flexible labor markets... faces... [nothing] like Japan's structural problems. Yet it still has--if by apparent choice--spent fifteen years with the same problems of monetary policy locked at zero and sputtering nominal growth. Almost nothing, as far as I can tell, has been written about Switzerland's place at the zero lower bound. The only things I can find are... two decade-old papers by a guy named Ben Bernanke. Well, at least I know one economist was watching. What happened to the Swiss wasn't missed.

Evan Soltas

Well, let's try to think about this...

In my view, at least, the principal reason people do not reach for the Swiss case is that its exports and imports average 85% of GDP: it is the ultimate open economy. Switzerland's extraordinary openness means that its monetary policy is, fundamentally, a dirty float against its surrounding neighbor the euro. Thus all the worries about the impotence of monetary policy at the zero lower bound vanish: even at the zero lower bound, the Swiss National Bank can stimulate exports and thus stimulate demand by picking a lower value for the Swiss franc and driving the exchange rate there.

The first-order question then becomes: Why don't they do so? Why do they formulate policy in terms of Swiss-franc LIBOR rather than setting out a rule mapping from the state of domestic demand to the level and direction of the value of the Swiss franc?

And the answer is that, when push comes to shove and they believed that they did have a serious need to rebalance the Swiss economy given what was going on outside, they did: in 2011 they announced that the Swiss franc would no longer be allowed to go above €0.83. And they made it stick:

FRED Graph St Louis Fed

The second-order question then becomes: Why has the SNB been satisfied--by and large--with the course of nominal demand, the price level, and resource utilization over the past fifteen years? Why haven't they sought a lower value for the Swiss franc and a higher-pressure economy?

The answer, presumably, is that they believe that their financial services-export sector is the crown jewel of their economy, to be cosseted via industrial policy, and that the best way to cosset that sector is to have a lower domestic inflation rate than any other major North Atlantic currency. The monetary and exchange-rate policy of Switzerland is, I think, best seen not as an exercise in macroeconomic stabilization but as an industrial policy, carried out in a context in which domestic interest rates have little effect on domestic demand, aimed at reinforcing the competitive advantage of its money-haven banking sector in a world in which there is a definite market to be served by promising that ours is the government which will not find a way to take your money via inflation, taxation, or "prudential" regulation.

How many of these lessons carry over to the United States? It is, after all, also in the business of reinforcing the competitive advantage of its financial system as international banker. But a policy that might make sense from the view of Switzerland as a whole, and perhaps from the view of all Swiss stakeholders except Italian-speaking guestworkers, makes a lot less sense for the United States.

Or so I think right now. I don't know enough about the Swiss case, ought to learn more, and may wind up changing my mind...


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856 words :: December 30, 2013

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