 How can financial constraints force a central bank to exit a currency peg? An application to the Swiss franc pegJulien Pinter and Marc Pourroy Journal of Macroeconomics, 2023, vol. 75, issue C Abstract: We analyze how financial constraints can weigh on a central bank’s decision to exit a temporary currency peg, such as the one put in place in Switzerland between 2011 and 2015. We show that negative equity or insolvency concerns can force a central bank to exit such a peg earlier than it would have done absent such concerns. We detail under which conditions such reasoning can apply for a traditional inflation-averse central bank. We then build an exchange market pressure model fitting with current peg reality to forecast both the central bank future bond holdings under a peg as well as its future losses. Applying our model to the Swiss franc peg, we show that negative equity concerns could have motivated the Swiss central bank early and puzzling peg exit in 2015, thereby providing a potential explanation for the “Frankenshock”. ECB QE policy appears as a potential key driver of this decision. Keywords: Swiss franc peg; Exchange rate regime; Exchange market pressure; Central bank solvency; Central bank capital (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:75:y:2023:i:c:s0164070422000866 DOI: 10.1016/j.jmacro.2022.103493 Access Statistics for this article Journal of Macroeconomics is currently edited by Douglas McMillin and Theodore Palivos More articles in Journal of Macroeconomics from Elsevier |
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