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.


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.

II. Is Capital Being: “Overaccumulated” in Switzerland? 1/

In saving and accumulating capital a country chooses to forego immediate consumption in order to increase consumption possibilities in the future. A balance thereby needs to be struck between the costs of curtailing consumption today and the benefits of increased consumption tomorrow. A very high consumption level today—and thus a very low level of savings and capital accumulation—cannot be viewed as optimal as it would not be sustainable in the future. By the same token, however, a very high level of savings and capital accumulation could be “too” high in the sense that—given decreasing returns to capital—the marginal return on capital may become too low to compensate for the present reduction of consumption. Even in a steady state overaccumulation can occur, in which case the consumption levels of the present and future generations are lower than they could be because too many resources are continuously being devoted to maintaining a too high capital stock. In this case the economy would not operate in a dynamically efficient way: both consumption today and in the future could be increased. The optimum level of capital would be reached when the long-run, sustainable level of consumption is maximized.

In this note, the criteria which the theory of optimal capital accumulation has brought forward to assess whether or not an economy is overaccumulating capital, are applied to the Swiss economy. Given different rates of return due to less than perfect international capital markets, the distinction is made between domestic investment and investment abroad. In the assessment of optimal capital accumulation, the social rate of time preference obviously plays a dominant role. The less weight a society attaches to the future—i.e., to the future consumption possibilities of the present generation as well as to those of future generations—the higher may be its consumption level today and the lower its level of savings. In many countries what is commonly perceived as too low a savings rate is rationalized as a reflection of a high social rate of time preference. 2/ Switzerland, judged by its savings behavior, seems to be close to having a zero social discount rate (on average). This could be regarded as the correct choice for a social discount rate, 3/ and hence the resulting savings behavior could be deemed as being optimal—even though rather unique by international standards. However, even assuming a social discount rate of zero, Switzerland appears to be accumulating capital domestically at a slightly excessive rate.

1. How much does Switzerland save?

Saving has been extraordinarily high in Switzerland throughout the postwar period. It allowed the Swiss economy to run a substantial current account surplus despite a comparatively high level of investment. Among the industrial countries, only Japan has had savings ratios which tended to be somewhat higher than those of Switzerland, with all other countries lying well behind, in terms of their ratio of savings to GDP (Chart II-1). In the 1980s, for example, the average gross savings/GDP ratio was 30 percent in Switzerland, topped only by Japan at 32 percent. The next highest saver, Germany, had an average savings ratio of only 22 percent, followed by Italy and France (21 percent), the U.K. (19 percent), and the U.S. (15 percent). The high rate of savings made Switzerland an important provider of capital even on a world-wide level: from 1989 to 1993 it has been the second largest supplier of net capital flows in the world, after Japan. 1/


Switzerland: Gross National Savings

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 032; 10.5089/9781451807226.002.A002

Source: IMF, World Economic Outlook database.

A particularly notable feature of national saving in Switzerland is the high level of public saving (Charts II-2 and II-3). Throughout the 1970s and 1980s public saving in relation to GDP has been broadly constant at 8 to 9 percent. This value lies far above other industrialized economies: in Japan, Germany, France and the U.K. the gross public saving ratio was around 4 percent on average in the 1970s and around 2 percent in the 1980s; in the U.S. and Italy public saving has been negative almost throughout this period. Furthermore, and unlike other industrialized economies, public saving in Switzerland has hardly been affected by cycles in the world economy or the two large oil crises. Only after 1990, when Switzerland slipped into a recession, has public saving actually fallen.


Switzerland: Gross Public Savings

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 032; 10.5089/9781451807226.002.A002

Source: IMF, World Economic Outlook database.

Switzerland: Gross Private Savings

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 032; 10.5089/9781451807226.002.A002

Source: IMF, World Economic Outlook database.

Some other indicators also point into the direction of a possible overaccumulation of capital. The investment rate has been very high in Switzerland, despite the absence of war destruction and hence the need to rebuild the capital stock. What is more, the return on capital has been comparatively low. Real interest rates have been considerably lower in Switzerland than in virtually all other major industrial countries. From 1979-94, for example, the average real interest rate differential in percentage points was 3.9 relative to France, 3.6 relative to Italy, 3.3 relative to the U.K., 2.2 relative to the U.S., 2.1 relative to Germany, and 1.9 relative to Japan.

2. Rules for optimal capital accumulation

The theory of optimal capital accumulation was developed in the 1960s and is based on a model of neoclassical growth. It is a normative theory that provides criteria to determine the optimal level of saving and capital accumulation in the steady state of an economy. The main criterion for the “golden rule” of capital accumulation, which maximizes steady-state per-capita consumption, is that the return to capital r should equal the sum of population growth rate n and technical progress g:


To see why this is optimal, assume that the capital stock is increased by a small amount, dK. The benefit is the additional output, deriving from the return on this incremental capital unit, r⋅dK. At the same time, however, also more resources must be devoted to keep the larger capital stock (K+dK) growing at the steady state rate of the economy, i.e., to account for the growing population and for technical progress. In the new steady state, more investment of (n+g)⋅dK units is needed than before. In the optimal steady state these additional costs just balance with the additional return r⋅dK and hence r=n+g. If the return falls below n+g, due to decreasing marginal returns, the additional output does not compensate for the additional cost and capital is actually overaccumulated.

There is no discounting of future consumption included in these arguments, the golden rule being the one that maximizes per-capita consumption for all generations. 1/

The golden rule as stated in (1) is, however, difficult to test for because of the nonobservability of the marginal return to capital. Therefore, often a second criterion, which can be derived from the criterion mentioned above (see annex), has been used to test for the golden rule. This criterion compares the inflows to, and outflows from, the capital stock. If the capital stock has the optimal size, the outflows (profits) from it will equal the inflows (investment) to it. The capital stock will neither be a “sink,” where permanently more resources are devoted to it than received from it, nor will it be a “spout,” where the current generation takes out more than it puts into it. In a dynamically inefficient context where investment exceeds profits, more is put into the capital sector than what flows out of it, and the capital sector is actually a “sink,” i.e., a net burden to the economy.

3. Application of the golden rule criteria to Switzerland

The first golden-rule criterion consists of a comparison of the real rate of interest in the economy with the economy’s growth rate, which is, in the steady state, equal to the sum of population growth and technological progress. If the real rate of interest lies below the economy’s growth rate, the economy would overaccumulate capital and be actually dynamically inefficient. In Switzerland, the real rate of interest, measured by the return on short- or long-term bonds net of inflation, has in fact been for many years lower than the economy’s growth rate (Table II-1). This has been particularly true in the years until 1989. From 1984 to 1989 the real interest rate was roughly one percentage point lower than the economy’s growth rate. In the years thereafter, the central bank had to raise short-term interest rates sharply to control rising inflation. At the same time, the economy experienced a recession so that the real interest rate in the post-1989 period exceeded GDP growth by a significant margin.

Table II-1.

Rates of Growth and Rates of Return in Switzerland

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Sources: IMF, WEO Database; OECD Database; IMF staff calculations.

However, even if the real interest rate for some years lies below the economic growth rate one cannot readily conclude that overaccumulation has occurred. For one thing, the real interest rate, measured by the return on government bonds net of inflation, is a safe return and may therefore be lower than the uncertain return on capital. Furthermore, only in a fully competitive economy is the real interest rate equal to the marginal return on capital. Hence the constellation of the real interest rate being lower than the economy growth rate is as such no proof of dynamic inefficiency. In fact, the same constellation has been found in many industrial countries which were otherwise deemed as dynamically efficient (see, for example Abel et al., 1989).

Given these problems, the second criterion mentioned above—the cash-flow comparison of investment and profits—is commonly used to assess the optimality of capital accumulation. This criterion does not suffer from the real interest rate being only a proxy for the return of capital. Rather, the profit figures are directly compared with the investment flows. Table II-2 gives the results for Switzerland. A distinction is made between the domestic balance (balance of capital accumulation and capital income within Switzerland) and the global balance (balance of capital accumulation and capital income domestically and abroad, by Swiss nationals).

Table II-2.

Capital Income, Capital Accumulation, and Dynamic Efficiency: the Swiss Case

article image
Sources: Swiss National Bank, Monthly Report, September 1995; IMF, WEO Database; IMF staff calculations. Figures may not always add up due to rounding.

It can be seen that over the past ten years more resources have been invested to augment the capital stock in Switzerland than have been received from it. If the economy is regarded as being in a steady state, this implies that capital has actually been overaccumulated. By this criterion, on average 0.9 percent of GDP (approximately Sw F 2.5 billion in 1994 prices) have been overaccumulated each year during the past ten years.

No other industrial country has experienced inflows into the capital sector exceeding outflows over such a long time period. For comparison, the figures for Germany, providing the balance of domestic profits and investment, are also given in Table II-2. They show that, over the same time horizon, annual profits in Germany exceeded annual investment by 1.5 percent of GDP (on average). Even in Japan, which is sometimes seen as a country that may have exceeded the optimal rate of capital accumulation, profits exceeded investment by 1.1 percent of GDP (on average) over the same period (see Miranda, 1995).

The amount of overaccumulation in Switzerland can be expressed not only in relation to GDP (which makes international comparisons easier), but also in relation to the level of investment itself ((investment-profits)/investment). This indicates that, given the level of domestic profits, inflows into the capital sector exceeded outflows by 3.3 percent, i.e., domestic investment over the 10-year period 1983-84 was on average 3.3 percent “too high.”

The picture looks different on a global level: if one compares investment and profits by Swiss nationals domestically as well as abroad, one comes to the conclusion that the right balance has been struck, with capital income being equal to investment on average. This indicates that, as far as global capital accumulation and saving behavior is concerned, Switzerland strikes the optimal balance of the golden rule. The difference between the results on the domestic and the global level can mainly be attributed to the higher return on investment abroad. The large supply of Swiss savings does not affect the global return to capital, given that Switzerland is a small economy, but it drives down the returns within Switzerland.

4. Modified golden rule: the role of the discount rate

The previous section assumed that society does not discount the utility of consumption in the future. Commonly, however, it is assumed that a society, just as a single individual, attaches a higher value to present than to future consumption. This leads to the modified golden rule, according to which the intertemporal allocation is optimal if the marginal product of capital equals the sum of population growth n, technological progress g and the social rate of time preference p: 1/


If p is positive rather than zero, the marginal product of capital should be larger than before, implying a lower level of capital stock, hence less capital accumulation, and a higher level of consumption: the present generation sacrifices future consumption to increase present consumption.

Usually, the rate of time preference is assumed to be a given parameter of the preference structure of an individual or a society as a whole and is exogenous, just as the rate of population growth n and the rate of technological progress g. From this background, equation (2) determines the optimal level of the capital stock K. However, the social rate of time preference is not observable. Therefore, two interpretations of the modified golden rule are possible: a normative interpretation would assume a rate of time preference p, say zero, and judge the actual savings behavior against that rule. If a rate of zero is assumed, Switzerland saves actually the right amount but accumulates too much capital domestically, while all other economies save too little. A positive interpretation would assume that the individual economies have optimized their savings behavior given the underlying rate of time preference, and thereby would be able to infer this rate from the behavior observed. Both approaches represent the two sides of the same coin, but even so the positive approach also yields some insights into the savings behavior of individual economies by allowing inferences about the underlying rate of time preference.

The serious difficulty with the positive approach, however, is related to data measurement. Estimation of the capital stock, the share of capital income in total income, the depreciation rate and the rate of technical progress all face difficult statistical measurement problems. Hence, it is only possible to obtain some rough and suggestive indications of cross-country differences in social discount rates based on this framework.

Rather than working with (2), which includes the difficult to measure return on capital, a steady-state condition of the modified golden rule shall be used which includes the level of the capital stock and the profit share directly. 2/ In the steady state, for the level of capital stock to be optimal, it must hold that the capital-output ratio equals the share of capital income in total income a, divided by the sum of the rates of population growth n, technological progress g, and time preference p (for the derivation see annex):


Given the necessary information on all observable data in (3), the underlying social rate of time preference p can be inferred. Because reasonably reliable capital stock and share of capital income are available for the business sector only (total economy excluding the government sector), all variables refer to this part of the economy. Table II-3 displays the results for different OECD countries. 1/

Table II-3.

Capital stock, Capital Income and Inference about the Underlying Rate of Time Preference

article image
Legend: Data are 1980-1992 averages; g and d are each assumed to be identical across countries.Source: OECD, Economic Outlook and Analytical Database, 1995; IMF staff calculations.

The results seem to confirm those of the previous section: Switzerland has a rate of time preference significantly below that one in other industrial economies. Table II-3 also shows what brings about this result. It is not the high, by international standards, level of the capital stock, but rather the unusually low share of capital income. Even though this capital income share is difficult to measure with precision (because rough adjustments have to be made for self-employed, whose labor input would otherwise be attributed to capital income), the magnitude of variation in the underlying social discount rates is remarkable, and the rate in Switzerland is clearly one of the lowest.

5. Possible factors underlying the high capital accumulation

The previous section provided one possible explanation for the high level of saving and capital accumulation: a low rate of time preference. This produces high savings and hence a low interest rate and a high level of investment. If, however, one is reluctant to accept that rates of time preference vary so much across countries, one has to search whether there are other factors that could provide some additional explanation for the high level of capital accumulation in Switzerland.

6. Conclusions

The claim, often heard in recent years, of inadequate saving and excessive consumption by present generations at the expense of future generations almost certainly does not apply in the case of Switzerland. If the golden rule criteria of optimal saving and capital accumulation provide a useful benchmark, then Switzerland, which is perhaps the only industrial country that strictly fulfills these criteria, appears to take future generations fully into consideration and does not discount their well-being. Nevertheless, the analysis in this paper suggests that too much capital may be accumulated within Switzerland. This seems to have been the case at least during the period from 1983 to 1994, when more resources have flown into the domestic capital stock, than have been received from it by way of profits, with the gap averaging almost 1 percent of GDP or 3.3 percent of investment.

The persistence of high domestic investment rates in Switzerland in the face of comparatively low returns on capital may be explained in part by widely-held expectations of a (trend) real appreciation of the Swiss franc against other currencies and by safe haven considerations for acquiring higher yielding assets abroad. Another possible explanation is related to the generous incentives for saving in Switzerland. As is well known, Switzerland has a very comprehensive pension system, which includes not only a public pay-as-you-go scheme (the so-called first pillar) but also a system of fully-funded, and compulsory, occupational pension schemes (the so-called second pillar). Furthermore, the state provides substantial fiscal incentives—in the form of tax deductions—for additional saving for pension purposes (the third pillar). One effect of the generous arrangements for saving, given imperfect capital mobility across countries, is to lower the cost of capital, relative to labor, in Switzerland. This, in turn, contributes to a highly capital-intensive structure of production. In fact, Switzerland is one of only a few advanced industrialized countries where the capital-output ratio has not remained relatively constant in the past but has instead displayed a monotonically increasing trend (Chart II-4). It may be concluded from this analysis that any steps that would help correct the distortion in relative factor prices, for example through measures that would dampen excessive incentives for saving, would not necessarily be harmful to longer-term economic growth but might rather stimulate it. At any rate, such measures should contribute to curbing the observed tendency towards an increasing capital intensity of production and to that extent raise the demand for labor.


Switzerland: Capital-Output Ratios in Selected OECD Economies

Citation: IMF Staff Country Reports 1996, 032; 10.5089/9781451807226.002.A002

Source: OECD Analytical Database; staff calculations.

ANNEX: Derivation of Criteria for Optimal Capital Accumulation

The theory of optimal capital accumulation was initiated by Phelps (1961) and Diamond (1965) and uses the neoclassical Solow-Swan model of economic growth. Its main contents can be summarized as follows. Let output be given by a linear homogenous production function Y=F(K,L) with inputs capital K and employment in efficiency terms L. Employment in efficiency terms is employment adjusted for labor augmenting technical progress, which is assumed to take place at rate g. In a closed economy output is either consumed or invested I in capital accumulation K’:


If the employment ratio is fixed, employment grows proportional to population at rate n. Normalization in per-worker terms (lower-case letters) gives the behavior of the per-worker capital stock k=K/L, which is proportional to the per-capita capital stock as


and in the steady state it holds that


In the steady state, investment per worker, i=f(k)-c, must equal the capital stock times the sum of the growth rate of population and the rate of technical progress so as to ensure that the capital stock grows in line with population (employment) growth and technical progress. This is true for any steady state and does not yet determine the optimal level of the capital stock. The desired level of capital stock is the level that maximizes the level of consumption. From c=f(k)-(n+g)k this is obviously the one for which holds:


To derive the implications of this rule for the level of savings, express total savings S as a fraction σ of the level of profits, which are given by the return to capital r times the capital stock:


The question then is: how high should total savings be in relation to profits, what is the optimal value of σ? Since savings equals investment and hence the change in the capital stock K’, the growth rate of the capital stock will be equal to σr=K’/K. In order to be in a steady state the capital stock has to grow at a K’/K=n+g. Combining these two conditions yields σr=n+g, from which, together with (4), it follows that σ=1 in the optimal, consumption maximizing steady state. This provides the second criterion for the golden rule: savings and hence investment should equal profits.

The criterion in section 4 is derived as follows. The return to capital r is given by the total return to capital (capital income over capital employed) net of depreciation d: r = αY/K - d. Since, under the modified golden rule, the net return equals the sum of population growth n, technological progress g and time preference rate p, it follows that K/Y = α/(n+g+p+d).

References Chapter II

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  • Blanchard, O. and S. Fischer, Lectures in Macroeconomics (Cambridge, MIT Press, 1989).

  • Diamond, P., Technical Change and the Measurement of Capital and Output,” Review of Economic Studies (London) Vol 32, (1965).

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  • International Monetary Fund, World Economic Outlook, May 1995 (Washington: International Monetary Fund, 1995).

  • Miranda, K., Does Japan Save Too Much?,” Chap. 2 in: Saving Behavior and the Asset Price “Bubble” in Japan - Analytical Studies. U. Baumgartner and G. Meredith (eds.), IMF Occasional Paper no. 124 (Washington: International Monetary Fund, April 1995)

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  • Phelps, E., The Golden Rule of Capital Accumulation: A Fable for Growthmen,” American Economic Review (Nashville) Vol. 51 (1961) pp.638643.

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  • Ramsey,F., A Mathematical Theory of Saving,” Economic Journal (London) Vol. 38 (1928) pp. 543559.


This chapter was prepared by C. Thimann.


See, for example, IMF, World Economic Outlook, May 1995, Chapter V.


The choice of social discount rates is often regarded as an ethical question. One of the earliest and best known proponents of a zero social discount rate, on the grounds that present generations have no right to discount future generations’ welfare, was Ramsey (1928).


IMF, World Economic Outlook, May 1995, p. 83.


A modified golden rule, which attaches greater weight to the present generation by discounting future generations’ consumption, is discussed in section 4.


See, for example, Blanchard and Fischer (1989) p.45.


For simplicity the rate of technical progress and depreciation are assumed to be identical across countries and are set at average levels derived in other studies. Since we are only interested in an international comparison of rates of time preference and not their levels themselves, the levels of technical progress and depreciation are not important as such.

Switzerland: Selected Background Issues
Author: International Monetary Fund