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The exchange rate elasticity of the Swiss current account

Author

Listed:
  • Johannes Eugster
  • Giovanni Donato

Abstract

This paper investigates the effects of Switzerland's real effective exchange rate (REER) on its current account. Using dynamic empirical methods, we focus on exchange rate movements that are unrelated to real and monetary developments, i.e., those more likely to be driven by the Swiss franc's safe-haven proprieties or unexpected exchange rate policy decisions. The paper's key result is that the Swiss headline current account has been largely inelastic to the exchange rate at the business cycle frequency. Three factors explain this somewhat counterintuitive result. A) A negative but short-lived effect on the trade balance is partly offset by a positive effect on net investment income. B) Large and often volatile net exports of nonmonetary gold blur the aggregate reaction. C) Improved terms-of-trade largely offset the negative effect on the (real) goods trade balance, as import prices tend to fall by more than export prices. The limited sensitivity of the current account, however, does not mean that the Swiss economy is insensitive to the exchange rate. Our results confirm that consumer prices, as well as corporate profits in particularly exposed sectors, decline significantly following an appreciation. These results suggest that an appreciation of the Swiss franc likely doesn't reduce Switzerland's current account quickly but rather tightens monetary conditions, reduces GDP, and hampers prospects in the longer term.

Suggested Citation

  • Johannes Eugster & Giovanni Donato, 2022. "The exchange rate elasticity of the Swiss current account," Working Papers 2022-14, Swiss National Bank.
  • Handle: RePEc:snb:snbwpa:2022-14
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    1. Dr. Romain Baeriswyl & Alex Oktay & Dr. Marc-Antoine Ramelet, 2023. "Exchange rate shocks and equity prices: the role of currency denomination," Working Papers 2023-05, Swiss National Bank.

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    More about this item

    Keywords

    Exchange rate; current account; pass-through;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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