Abstract
This compilation of summaries of Working Papers released during January-June 1995 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period. Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201.
This paper describes the various components of the Swiss balance of payments in historical perspective and compares them to those of other countries. It also describes the long-run evolution of Switzerland’s net foreign asset position as a proportion of GDP.
Two macroeconomic phenomena make Switzerland stand out among other countries: first, it has had a persistent current account surplus and the largest ratio of net foreign assets to GDP in the world; and second, its real interest rates have been significantly lower than those of most other industrialized countries, earning it the label “interest rate island.”
The paper attempts to bring these two distinctive features of the Swiss economy within a consistent framework. It argues that they may be related and that ultimately both may result from an excess of national savings over investment for many years. The paper also briefly discusses possible determinants of the Swiss investment and saving ratios, both of which are high by international standards.
The real interest differential is decomposed into deviations from uncovered interest rate parity (UIP) and deviations from ex ante relative purchasing power parity. In common currency terras, assets denominated in Swiss francs have yielded less than similar safe assets denominated in other currencies over the past two decades. Thus, the sign and large magnitude of this deviation from UIP suggest that a foreign exchange rate risk premium compensates Swiss residents for holding net assets in foreign currency and foreign residents for bearing net liabilities in Swiss francs.