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The Swiss National Bank’s fear of float

Author

Listed:
  • Kristin Berthold

    (University of Applied Sciences Erfurt, Faculty of Business and Economics, Erfurt, Germany)

  • Georg Stadtmann

    (European University Viadrina, Faculty of Business and Economics, Chair of Macroeconomics, Frankfurt (Oder), Germany)

Abstract

We theoretically examine under which assumptions the impossible trinity holds. We also focus on the most recent Swiss experience and ask whether the SNB gained monetary independence by switching from a fixed to a floating exchange rate system in January 2015. The theoretical examination shows that the impossible trinity holds under the following assumptions: Equality of domestic and foreign real interest rates, the quantity theory of money holds, and that the relative PPP is fulfilled. The empirical analysis reveals that relative PPP does not hold for the Swiss case and it was necessary for the SNB to adopt its monetary policy in accordance with the ECB’s expansionary monetary policy. We show that for a small open economy, such as Switzerland, whether the central bank implements a fixed or a floating exchange rate system does not play a role in its monetary policy independence.

Suggested Citation

  • Kristin Berthold & Georg Stadtmann, 2019. "The Swiss National Bank’s fear of float," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 8(2), pages 51-64.
    • Handle: RePEc:cbk:journl:v:8:y:2019:i:2:p:51-64
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    More about this item

    Keywords

    Foreign exchange market; Swiss crisis; impossible trinity; monetary policy independence.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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