Appreciation Pressures and Real Depreciation: The Experience with the Swiss Franc-Euro Exchange Rate Floor

Tobias F. Rotheli

International Business Research, 2016, vol. 9, issue 8, 84-90

Abstract: We study the course of the Swiss price level during the recent episode where Switzerland enforced a floor on the Swiss Franc exchange rate relative to the Euro. Given the strong nominal upward pressure on the Swiss currency the introduced limit of 1.20 Francs per Euro led to a quasi-fixed exchange rate from 2011 until early 2015. This measure was specifically aimed at helping the firms of the Swiss export sector to compete internationally. A further reason for imposing this floor was the Swiss National Bank¡¯s concern with deflationary pressures. Interestingly, it turned out that during the episode with a quasi-fixed exchange rate the Swiss price level came under downward pressure. We offer an analysis that helps to understand this depreciation of the Swiss currency in real terms which in fact contributed to the exchange rate floor being eventually abandoned. The article thus clarifies some intricate mechanisms affecting the choice of exchange rate policies which are so important for firms in the export sector. As a theoretical contribution (complementing the well-known Balassa-Samuelson analysis) the article presents a computable equilibrium model that explains real exchange rate variations with diverging trends in the productivity growth of the non-traded goods sectors of economies.

Keywords: exchange rate floor; nominal appreciation and real depreciation; deflation (search for similar items in EconPapers)
JEL-codes: E31 E52 F31 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:ibn:ibrjnl:v:9:y:2016:i:8:p:84-90

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