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Switzerland

 
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PostPosted: Sun Jan 18, 2015 2:50 pm    Post subject: Switzerland Reply with quote

Professor Hamilton:

Of course, what I could end up doing with such a peg is create inflation. And this is why Lars Svensson http://www.nber.org/papers/w7957 proposed a variant of the former Swiss strategy as part of a “foolproof way” to escape deflation and a liquidity trap.

But there appear to be no signs of inflation yet in Switzerland. So why did the Swiss think that the peg could no longer be maintained? I simply do not understand the claim that the central bank was forced to abandon the peg.

I conclude that instead the central bank just wanted to try something different. But I confess that it is a great mystery to me why they wanted to do that. This has to be a major hit to Swiss exports and tourism, leave the Swiss National Bank with little credibility and negative capital, and will likely cause significant financial disruptions in many places around the world.

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PeakTrader:

Switzerland is a small country.

Exchanging too many francs for euros may eventually cause inflation.

And, what happens if the euro collapses?

It would take more euros to buy back francs.

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Burt:

I believe there is another reason that the Swiss did what they did. The largest industry in Switzerland is not watchmaking or tourism, but hard money. Ever wonder why a small country like Switzerland has such a huge banking sector? It’s because wealthy people worldwide trust the Swiss to protect their wealth. This has also led to a major “industry” of second homes and dual citizenships. If the SNB were to do what you say, this trust would be reduced. There’s no point in storing your wealth in an asset the supply of which is going to infinity. I know that you might say that this worry is pointless; there is no inflation in Switzerland. But actual inflation is not the point here – we are talking about perception and asset price inflation.

This is the kind of issue that does not appear in the standard economic models, and indeed it is probably not that relevant in most large economies. This is pretty much a special case.

One more thing: The SNB is actually a public exchange-listed company. It has private minority shareholders. So the losses it took on its Euro holdings have legal implications.

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Googled "impossible trinity and snb"

http://bubblesandbusts.blogspot.com/2013/01/the-impossible-trinity-or-permanent.html

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http://www.moneyandbanking.com/commentary/2015/1/18/a-swiss-lesson-in-time-consistency

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More comments:

http://econbrowser.com/archives/2015/01/switzerland-drops-its-currency-peg#comments

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