This Selected Background Issues paper on Switzerland reviews a few monetary and exchange rate issues, including questions related to the monetary policy framework and the assessment of recent monetary conditions and exchange rate developments. The paper examines the Swiss savings and investment levels from a welfare point of view, employing for this purpose some “golden rule” criteria of capital accumulation put forward in the academic literature. It finds that, with its unusually high levels of saving, Switzerland may be one of the few advanced industrialized countries that strictly fulfills the “golden rule” criteria.

Abstract

This Selected Background Issues paper on Switzerland reviews a few monetary and exchange rate issues, including questions related to the monetary policy framework and the assessment of recent monetary conditions and exchange rate developments. The paper examines the Swiss savings and investment levels from a welfare point of view, employing for this purpose some “golden rule” criteria of capital accumulation put forward in the academic literature. It finds that, with its unusually high levels of saving, Switzerland may be one of the few advanced industrialized countries that strictly fulfills the “golden rule” criteria.

Introduction

This selected background issues paper consists of four chapters. The first chapter reviews a few monetary and exchange rate issues that have received attention recently, including questions related to the monetary policy framework and the assessment of recent monetary conditions and exchange rate developments. Its main objective is to supplement the background material that was provided in the staff report in order to facilitate the analysis of these issues, although in some instances it also includes a brief discussion of available policy options.

Chapter II examines the Swiss savings and investment levels from a welfare point of view, employing for this purpose some “golden rule” criteria of capital accumulation put forward in the academic literature. It finds that, with its unusually high levels of saving, Switzerland may be one of the few advanced industrialized countries that strictly fulfills the “golden rule” criteria and may therefore be seen as a country that does not “discount” at all the welfare of future generations. The analysis also suggests that the amount of capital that is accumulated within Switzerland may be excessive in the sense that the return on it may be too low to justify the foregone consumption possibilities. The chapter discusses briefly likely factors behind this high level of saving and domestic capital accumulation, such as a generous savings subsidization and the existence of large internationally under-diversified pension funds.

Chapter III examines some aspects of the very large Swiss net foreign asset position (over 100 percent of GDP) which has been built up as a consequence of the persistently high levels of savings and current account surpluses. It finds that the return on both assets and liabilities is lower in the case of Switzerland than in other countries. Furthermore, in contrast to other countries, the return that Switzerland “earns” on its foreign assets is higher than the return it “pays” on its foreign liabilities. This positive differential contributes significantly to the country’s sizable net investment income and current account surplus. The chapter reviews a few potential explanations for international differences in rates of return on external assets and liabilities.

The last chapter analyzes existing non-tariff barriers to trade and discusses their possible impact on the price level and the large current account surplus. It reports in particular on some evidence of the significance of such barriers, which in Switzerland take the form mainly of technical norms and regulations, but recognizes that any effect they may have in restricting trade may not only be incidental but is also difficult to measure. The chapter then uses implicit price data from Germany’s detailed trade returns to test whether prices of German exports to Switzerland are higher than to other destinations. Although the evidence is mixed, the hypothesis that NTBs contribute to comparatively high import prices cannot in some instances be rejected. The chapter also discusses whether non-tariff barriers have an impact on the trade balance. Theoretical considerations give little guidance on this issue, while empirical evidence based on import data does not indicate the presence of protective barriers.

I. Selected Monetary and Exchange Rate Policy Issues 1/

This note supplements the background material that was provided in the Staff Report for the 1995 Article IV Consultation with Switzerland (SM/96/14, 1/24/1996) to facilitate the discussion of three topical monetary and exchange rate policy issues. The first of these issues concerns the assessment of current monetary conditions and the second the framework for the conduct of monetary policy. The last issue relates to the real exchange rate of the Swiss franc.

1. Assessment of monetary conditions

The monetary policy stance was eased progressively in the course of 1995 as it became evident that inflationary pressures remained subdued, notwithstanding the substantial effects on the price level stemming from the introduction of VAT at the beginning of the year, and that economic activity was considerably weaker than expected. This easing was reflected in a steep downward trend in money market rates which fell from about 4 percent in late 1994 to below 2 percent in late 1995. The discount rate of the Swiss National Bank was also lowered in four sizable steps (each equivalent to 50 basis points) to 1.5 percent by the end of 1995. 2/

An important policy question is whether the room for lowering interest rates, without endangering the authorities’ main objective of maintaining price stability over the medium term, has by now been fully utilized. Not surprisingly, a review of conventional indicators of monetary conditions does not allow for an unequivocal answer. The evolution of the seasonally adjusted monetary base, which the National Bank continues to regard as its key policy variable, has been broadly in line with the Bank’s quarterly forecasts during most of 1995, even though the growth in the main determinants of the demand for base money (prices and real GDP) has fallen well short of expectations when the forecasts were made (Chart I-1). Taken in isolation, this might be interpreted as an indication that the policy response to the unanticipated weakness of monetary demand has already been adequate. The growth of the broader monetary aggregates has also accelerated somewhat in recent months (Chart I-2), the yield curve has steepened considerably (Chart I-3) and real short-term interest rates have become negative. On the other hand, however, it is also relevant to observe that the monetary base remains substantially below its medium-term targeted path, that it has recently tended to slow rather than accelerate, and that the rates of growth of the broader aggregates are still modest if seen in the context of the recent steep fall in interest rates and well below levels that would signal the possible re-emergence of inflationary threats. 1/ Moreover, the steepening of the yield curve has not been associated with any firming of bond yields (which could have been expected to occur if the drop in short-term rates had gone beyond prudent levels). Last but not least, the Swiss franc has continued to display remarkable strength in the exchange markets and its appreciation during 1995 has offset much of the easing in monetary conditions suggested by other indicators. 2/

CHART I-1.
CHART I-1.

Switzerland: Monetary Base - Targeted Path and Actual Growth

Citation: IMF Staff Country Reports 1996, 032; 10.5089/9781451807226.002.A001

Sources: Swiss National Bank.1/ One percent per annum from 1989, fourth quarter, and 1994, fourth quarter, respectively.
CHART I-2.
CHART I-2.

Switzerland: Monetary Developments

(12-month percent changes)

Citation: IMF Staff Country Reports 1996, 032; 10.5089/9781451807226.002.A001

Sources: Swiss National Bank.1/ Seasonally adjusted; in billions of Swiss francs. The fall in bank reserves and monetary base in 1988-90 was related to changes in reserve requirements and the payments system.
CHART I-3.
CHART I-3.

Switzerland: Gap (Bond Yield - Short Term Rate)

Citation: IMF Staff Country Reports 1996, 032; 10.5089/9781451807226.002.A001

Source: Swiss Institute for Business Cycle Research, data tape.

In view of the somewhat conflicting signals provided by the aforementioned conventional indicators, the staff has constructed a composite Monetary Conditions Index (MCI) for Switzerland, following closely methodology that has been developed and applied in other countries. The MCI combines information on the monetary stance emitted by real interest rates and the real exchange rate and has been found in some cases to be a better predictor of inflation and economic growth than the monetary aggregates or other partial indicators.

The approach employed and the results obtained are described in some detail in Annex I and the Index is plotted in Chart I-4. The MCI indicates that a very pronounced tightening of monetary conditions took place in the course of 1994, reflecting both a steep real appreciation of the Swiss franc and a substantial firming of real short-term interest rates. The latter was caused by declining inflation against the background of stable nominal interest rates. During 1995 the two components of the MCI moved mostly in opposite directions. Overall, the Index rose further during the first few months of the year and declined (erratically) thereafter, but at the end of 1995 it was only modestly lower than a year earlier. Taken at face value, this would seem to imply that monetary conditions were still rather tight at the end of 1995, lending further support to the view that the downward trend in interest rates may not have run its full course, as yet.

CHART I-4
CHART I-4

Switzerland: Monetary Conditions Index (MCI) 1/

(Average Jan. 1983-Sept. 1995 = 100)

Citation: IMF Staff Country Reports 1996, 032; 10.5089/9781451807226.002.A001

Source: IMF staff calculations.1/ Index of the absolute change in the real short-term interest rate and percentage change in the r exchange rate compared to their average levels over the period January 1983 to December 1995.A ratio of 3 to 1 is used between an increase in real interest rate and an appreciation of the excha2/ Real effective exchange rate based on relative ULC.3/ Real effective exchange rate based on relative consumer prices.

However, it is important to add several caveats. First, the ability of the MCI to predict inflation in the case of Switzerland has not been thoroughly tested; indeed some preliminary work by the staff in this regard is not reassuring. Second, by the nature of its construction the MCI cannot distinguish between changes in interest and/or exchange rates that reflect policy actions and changes associated with exogenous “shocks” and underlying fundamentals (such as, for example, the trend appreciation of the Swiss franc). Third, and perhaps most important, the behavior of the index in the short run tends to be dominated by changes in the exchange rate which has displayed substantial volatility. It is questionable whether the authorities should seek to counterbalance such volatility through compensating changes in domestic interest rates. For all these reasons, the MCI can at best be regarded as a potentially useful supplementary indicator of monetary policy and not as a candidate for replacing other target variables.

2. The policy framework

Over the past several years, the demand for base money (which remains the target variable) has turned out to be rather unpredictable. Initially, the instability resulted from the introduction of a new electronic interbank payments system and from changes in liquidity requirements (both in 1988) which lowered drastically the demand for bank reserves. However, technological innovations have continued to influence the behavior of base money even after the effect of these shocks had been absorbed and it is still not entirely clear whether a stable relationship between base money and inflation has been reestablished. In light of this, some observers have suggested that it might be preferable for the SNB to change its target variable or even to abandon altogether the present framework, for example in favor of targeting inflation directly.

The view of the staff on this issue is that the case for a change in the policy framework in Switzerland is neither particularly strong nor pressing. The recurrent signs of instability in the demand for base money are of course troublesome. However, the conduct of policy in practice has been pragmatic and has not been constrained by rigid adherence to the monetary targets. The authorities have continued to emphasize that they do not focus exclusively on the monetary base but do instead monitor closely and take into account a range of other indicators, including the broader monetary aggregates and the exchange rate of the Swiss franc. Thus, the framework has served mainly as a disciplining device that compels the authorities to not simply publish analyses of monetary developments but also to explain in detail the rationale for their policy decisions and for deviations from the monetary targets. In view of this emphasis on transparency and accountability and the authorities’ good record in reining in inflation, the recent recurrent and persistent departures from the monetary rule have had no visible impact on policy credibility. Interest rate differentials even vis-à-vis Germany remain highly negative and the Swiss franc remains the currency of choice for many investors seeking refuge from more inflation-prone countries.

Nevertheless, frequent inability or unwillingness to meet the monetary target creates confusion and, if it persisted in the long run, would risk undermining the credibility of the framework. It is therefore useful to keep the issue under review and to explore whether there are alternative approaches to monetary control that might prove superior.

As noted, one option that has been advocated by some critics of the present framework is direct inflation targeting. This has proven useful in many countries in recent years. However, almost invariably, these have been countries whose previous anti-inflation credentials were not strong and which, therefore, unlike Switzerland, needed to build policy credibility almost from scratch. Moreover, the usefulness of the approach in helping to keep inflation in check once it has been brought down to an acceptably low level has not yet been tested. It is also worth noting that, in principle, inflation targeting presupposes a reasonably stable (predictable) relationship between the target and the policy instruments available to the authorities. As the existence of such a relationship in the Swiss case has not been firmly established, the probability of missing policy targets could be even greater than under the present regime and the cost to credibility more damaging.

Another option would be to maintain the monetary targeting framework but change the target variable. In recent years, the velocity of the broader monetary aggregates appears to have been more stable than that of the monetary base (Chart I-5) and this seems to be supported by more rigorous analytical work by the Swiss National Bank. 1/ However, an important drawback of the broader aggregates is that they are far more sensitive to changes in interest rates than MO. This implies during periods of disinflation and falling interest rates, such as the present period, that the monetary targets would have to be set at levels that appear high to the casual observer, if undue monetary tightness is to be avoided. This problem would not be present if targets were set only for the medium term, but even then, the authorities would have the awkward task of trying to convince the markets and the public that substantial oscillations of monetary growth around the medium-term target would not necessarily be cause for concern.

CHART I-5.
CHART I-5.

Switzerland: Velocity of Circulation of Various Monetary Aggregates

Citation: IMF Staff Country Reports 1996, 032; 10.5089/9781451807226.002.A001

Source: Swiss National Bank.

A third option that deserves to be considered is targeting the exchange rate (explicitly or implicitly). Possible disadvantages include the risk of destabilizing capital inflows, which could undermine monetary control and longer-term inflation objectives, and the likelihood that Switzerland would gradually lose the benefit that it currently derives from its comparatively low interest rates (except insofar as these reflect differences in tax regimes and other nonmonetary factors). However, higher interest rates may have side effects, in terms of the capital intensity of production, that are not necessarily undesirable. Another potential advantage of pegging the exchange rate would be the increased predictability of the competitive environment in which Swiss firms operate.

3. The exchange rate of the Swiss franc

The Swiss franc has appreciated, almost continuously, since mid-1992 in both nominal and real effective terms. The cumulative real appreciation has been on the order of 20 percent (Chart I-6). As was noted in SM/96/14, this increase in the value of the Swiss franc was not as dramatic (in terms of either size or speed) as the one that Switzerland had experienced in 1977-78. Nevertheless, it has been sufficiently pronounced to take the real exchange rate of the franc clearly above its long-run trend line (which displays a gentle upward slope). It has also adversely affected the performance of both the export and the import-competing sectors of the economy, generating major concerns that the Swiss franc may have become overvalued.

CHART I-6.
CHART I-6.

Switzerland: Real Exchange Rates of the Swiss Franc During Two Periods of Strong Capital Inflows

(Trough = 100)

Citation: IMF Staff Country Reports 1996, 032; 10.5089/9781451807226.002.A001

Source: Swiss Institute for Business Cycle Research, data tape.1/ The trough of the real exchange rate was in May 1977.2/ The trough of the real exchange rate was in April 1992.

The strength of the Swiss external current account position, however, makes it difficult to accept, without qualification, the view that the franc is overvalued. It is true that the current account surplus (estimated to have been about 6.5 percent of GDP in 1995) can be attributed in part to cyclical conditions (i.e., a somewhat larger output gap in Switzerland than on average in her main trade partners). It is also true that the effects of recent losses in competitiveness have not yet been fully reflected in trade and other current account flows. Nonetheless, staff estimates of the “underlying” current account surplus indicate that, at some 4 percent of GDP, it is at least as large as the surplus that is required to stabilize Swiss net foreign assets at their current very high level in relation to GDP (over 100 percent). 1/ It is not possible to tell if the present level of net foreign assets is optimal, as there is no operationally meaningful definition in this context. Nevertheless, the fact that Swiss net foreign assets (in relation to GDP) are much higher than those of any other advanced industrial country (see chapter 3 below) makes it difficult to think that they might be in some sense suboptimal. Moreover, it seems plausible to expect that the “need” for Switzerland to maintain a high level of net foreign assets may decline in the not too distant future as the demographic factors that contributed to the exceptionally high Swiss saving ratio begin to be reversed. If this view is accepted, then one might consider the real appreciation of the Swiss franc as part of the mechanism that will help bring about a gradual reduction in the stock of Swiss net foreign assets relative to GDP. 2/

A conclusion that may be drawn from this analysis is that the level of the real exchange rate is not necessarily unsustainable from a medium-term perspective. Nevertheless, the pace at which the franc has strengthened over the recent past is a legitimate policy concern, as it risks aborting the still fragile recovery in business activity and probably overstretches the capacity of the economy to shift resources from the tradables to the nontradables sector in the short to medium term. In view of this concern, it would seem appropriate for the authorities to seek to moderate the franc’s rise, through a judicious relaxation of domestic monetary conditions and through other measures that might ease constraints on capital exports or undue incentives for capital imports. However, it would also be important to speed structural reforms that would increase the flexibility and dynamism of the nontradable sectors and thereby reduce the economy’s dependence on a thriving tradables sector.

ANNEX: A Monetary Conditions Index (MCI) for Switzerland

1. Introduction

Monetary policy in Switzerland is based on the premise that there is a stable long-run relationship between the Seasonally Adjusted Monetary Base (SAMB) and inflation. Since 1990 medium term targets for the SAMB have been set consistent with an inflation rate of about 1 percent over the medium term—which is the ultimate objective of monetary policy—and based on assumptions about potential GDP growth and trends in the velocity of SAMB. Since 1990 actual growth in SAMB has continuously undershot its targets while inflation objectives—at least in the latter part of the period—have been met. The reasons for the apparent weakness in the relationship between SAMB and demand/inflation—e.g., for unexpected changes in velocity—are innovations in payments technology, improved liquidity management by banks, and changes in banking regulation. The result is that SAMB has become less useful as an intermediate target for monetary policy. Other indicators may thus provide useful information about monetary conditions.

The broader aggregates M1, M2 and M3 may serve as such indicators. The improvements in the definitions of these aggregates in 1995, may have enhanced their usefulness. 1/ However, these indicators are also quantitative variables and thus in principle subject to the same weaknesses as regards the relationship with inflation, demand, and output as SAMB.

Alternatively, price variables like interest rates and exchange rates could be used as indicators of the monetary stance. Both interest rates and exchange rates have considerable impact on demand and inflation. An additional requirement for a variable to qualify as an indicator of monetary conditions is that policy action is easily reflected in the behavior of the variable. That is obviously the case for very short-term interest rates. Through the impact of short-term interest rates on capital flows monetary policy actions should also fairly rapidly be reflected in the exchange rate as well.

2. The construction of an MCI for Switzerland

During the past few years several countries, mainly after having been forced to abandon a fixed exchange rate regime, have introduced an MCI to help assess the stance of monetary policy. 1/ The MCI is constructed as a weighted average of real short-term interest rates and the real effective exchange rate. The idea is that monetary policy, in particular in small open economies, works both through the interest rate level and the exchange rate. Accordingly an MCI has been constructed for Switzerland based on the following formula:

(1)MCI=(rr(avg8395)+1/3(reer/reer(avg19831995))1)*100
  • r = real short term interest rates. 3-month deposit rates deflated by the change in the consumer price index over the last three months, compared to the previous three months, at an annual rate. 2/

  • reer = real effective exchange rate based on relative consumer prices. 3/

Formula 1 implies that a one percentage point increase in the real interest rate is assumed to have 3 times as large an effect on demand conditions as a one percent appreciation of the real effective exchange rate. These are the weights most frequently used in the MCI for other countries. In those cases the weights have been based on estimates of the relationship between the indicators and demand conditions. Some preliminary attempts by the staff to estimate this relationship have not provided clear guidance as to what the weights should be. Nevertheless, it seems plausible that their relative importance should be about the same in Switzerland as in these other countries, in particular because foreign trade constitutes about the same share of GDP.

In principle also a nominal interest rate and a nominal effective exchange rate could be used in compiling the MCI. The main reason why the indicators constructed for other countries have used real variables, is because of their well founded effects on real demand and hence on the output gap and inflation. Anyway, a real and a nominal MCI would be highly correlated.

Mostly for practical reasons, a backward-looking indicator of inflation expectations is used to deflate the nominal interest rate. But backward-looking elements are also deemed to be important in price setting in Switzerland as nominal wages tend to be adjusted to past changes in prices. As a result of the use of a backward-looking indicator, however, there is a risk that monetary conditions may change without that being captured by the MCI in circumstances when inflation expectations change. Neither in the case of supply shocks will the MCI appropriately measure monetary conditions.

The changes in the components of the MCI are measured in relation to a base period. In formula 1 the average of the period 1983-1995 is used as a base period. One should not, however, attach much importance to the base period and thus to the level of the index. Changes in the equilibrium short-term real interest rates and the reer over time will make the level of the MCI hard to interpret. Changes in the equilibrium short-term real interest rate could, for instance, be caused by changes in the tax system that alter the gap between real and real after-tax interest rates or structural changes in the financial market that alter the relative importance of short- vs. long-term interest rates in lending and borrowing decisions. Similarly, the equilibrium reer could for instance be affected by a terms of trade shock. What is important is the change in the index over a short period of time, which in general should reflect a loosening or tightening of monetary policy.

3. How an MCI would affect the assessment of monetary conditions

In Chart I-7 the MCI for Switzerland is shown together with its components; the real short-term interest rate and the real effective exchange rate. In addition, inflation, SAMB, and the monetary aggregates M1 and M3 are shown. 1/

CHART I-7.
CHART I-7.

Switzerland: Inflation and Indicators of Monetary Conditions

Citation: IMF Staff Country Reports 1996, 032; 10.5089/9781451807226.002.A001

Source: Swiss Institute for Business Cycle Research, data tape; and IMF staff calculations.1/ Index of the absolute change in the real short-term interest rate and percentage change in the real effective exchange rate compared to their average levels over the period January 1983 to December 1995. A ratio of 3 to 1 is used between an increase in real interest rate and an appreciation of the exchange rate.2/ Seasonally adjusted Monetary Base.

After an initial tightening in 1986 the MCI shows an easing in monetary conditions through 1987 and 1988, in the latter year mainly because of depreciation of the exchange rate. Monetary conditions subsequently became tighter, but then fluctuated up to mid-1992 reflecting movements both in the real exchange rate and the real interest rate. Since mid-1992 the MCI has increased substantially, both because of higher real interest rates and a real appreciation of the Swiss franc. Real interest rates increased in 1993 and 1994 as nominal interest rates remained steady while inflation came down. In the first part of 1995 the continued appreciation of the currency increased the MCI. The exchange rate stabilized in the autumn of 1995 and the fall in the MCI was brought about by a significant reduction in short-term interest rates.

The rise in inflation to over 6 percent in the beginning of the 1990s has been attributed to lax monetary policy in 1987 and 1988. In that period changes in the payments system and in bank reserve requirements had led to a sharp reduction in bank reserves and thereby seriously destabilized the monetary base as can be seen from Chart I-7. In contrast to the confusing signals from the monetary aggregates, the MCI unambiguously signalled that monetary conditions were being relaxed in 1987 and 1988. With the benefit of hindsight it seems clear that the MCI could have provided useful information in that period and could have induced a tightening of policy earlier in 1988 than was actually the case.

Also during 1994 the MCI might have been helpful in the conduct of monetary policy. Changes in banks’ liquidity management again made SAMB an unreliable indicator of monetary conditions. The broader aggregates M1 and M3 grew more rapidly than SAMB and while the pace of growth slowed during the year these indicators signalled, if anything, an even smaller need of a monetary relaxation than did the SAMB. Throughout 1994 the SAMB continued to undershoot its target as it had done since the medium-term target path was introduced in 1990. At the same time, inflation came down to below 1 percent and doubts about the reliability of the SAMB may have contributed to the authorities’ reluctance to relax the monetary stance. The MCI, on the other hand, clearly indicated that monetary conditions were becoming tighter throughout 1994. If an MCI had been used under these circumstances it might have brought forward the easing of monetary policy that subsequently took place. However, it is fair to remember that the delay in easing monetary policy was not due to any lack of evidence that conditions were tight (after all SAMB was still well below its targeted path). Rather, it reflected the authorities’ concern to ensure that the introduction of VAT at the beginning of 1995 would not lead to a wage-price spiral. Once it became clear that the risk of such a spiral had been averted, the policy stance was progressively eased.

References Chapter I. Annex

  • Corker, Robert, Indicators of Monetary Conditions,” Chap. 5 in United Germany: The First Five Years. IMF Occasional Paper No. 125 (Washington: International Monetary Fund, 1995).

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  • Fluri, Robert, Grundlagen zur Revision der Geldaggregate im Jahre 1995,” Quartalsheft Schweizerische Nationalbank (Zürich), Vol. 13 (No. 1, 1995) pp. 7688.

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  • International Monetary Fund, Sweden-Recent Economic Developments. SM/93/169, (Washington: International Monetary Fund, 1993.

  • Rich, Georg,Monetary Targets as a Policy Rule: Lessons from Swiss Experience” (paper presented at Bank of Canada, June 23, 1995).

1/

This chapter was prepared by H. Vittas, and the annex by A. Lund.

2/

In the first two instances, the Swiss National Bank adjusted its discount rate after money market interest rates had already fallen. The third and fourth cuts, by contrast, were accompanied by explicit official efforts to lower money market rates further by supplying additional base money to the banks.

1/

By contrast to the monetary base (MO), the broader monetary aggregates, notably M1 and M2, are highly sensitive to changes in interest rates. Thus, the acceleration in their rate of increase in recent months is a direct reflection of the impact of falling short-term interest rates and does not, on the basis of historical experience, warrant any concern about future inflation. The growth of M3, the demand for which is not highly elastic with respect to changes in interest rates has remained subdued.

2/

Non-monetary indicators, such as the size and evolution of the output gap and the level and trend of the unemployment rate, also tend to suggest that there may still be some leeway for relaxing monetary conditions further without jeopardizing inflation objectives. However, it is not possible to draw firm conclusions about the appropriateness of the monetary policy stance from these indicators as they have to reflect the effects of the policy easing already implemented and as there is considerable uncertainty about the size of these effects and the length of the lags involved.

1/

The SNB has found, in particular, that the demand for M2 is more stable from an econometric point of view than either MO or M1 and M3.

1/

The underlying current account surplus is derived from the actual surplus after adjusting for the effects of relative cyclical conditions as well as the effects of past exchange rate changes that are still in the pipeline.

2/

The fact that real bond yields in Switzerland are lower than in most other industrial countries can be interpreted as a sign that financial markets expect such a real appreciation over the long run. However, the implied rate of appreciation is much lower than that experienced over the past few years.

1/

For details, see Fluri (1995).

1/

Examples include Canada, Norway, Sweden, and the United Kingdom.

2/

The introduction of VAT from January 1, 1995 temporarily increased the measured rate of inflation. To avoid the subsequent drop in the real interest rate, new values for the consumer price inflation were constructed for the first half of 1995 by extrapolating the underlying growth rate from the second half of 1994.

3/

As the reer was available only through October 1995 it was extrapolated through December using the same growth rate as that of the nominal effective exchange rate.

1/

The series in the graph are in accordance with the new definition. Consequently, they were not available and did not serve as guides to monetary policy prior to 1995.

Switzerland: Selected Background Issues
Author: International Monetary Fund
  • View in gallery

    Switzerland: Monetary Base - Targeted Path and Actual Growth

  • View in gallery

    Switzerland: Monetary Developments

    (12-month percent changes)

  • View in gallery

    Switzerland: Gap (Bond Yield - Short Term Rate)

  • View in gallery

    Switzerland: Monetary Conditions Index (MCI) 1/

    (Average Jan. 1983-Sept. 1995 = 100)

  • View in gallery

    Switzerland: Velocity of Circulation of Various Monetary Aggregates

  • View in gallery

    Switzerland: Real Exchange Rates of the Swiss Franc During Two Periods of Strong Capital Inflows

    (Trough = 100)

  • View in gallery

    Switzerland: Inflation and Indicators of Monetary Conditions