Foreign Currency Denominated Assets and International Shock Absorption in Switzerland and Japan

Gunther Schnabl

No 5624, CESifo Working Paper Series from CESifo

Abstract: Currencies of countries with persistent current account surpluses and high foreign currency denominated assets such as the Swiss franc and Japanese yen are under a persistent appreciation pressure, what restricts the degree of freedom in the choice of exchange rate regime. Official announcements (implicit communication) of appreciations can trigger runs into the domestic currency, which make appreciation expectations self-fulfilling. The resulting negative growth effect is likely to trigger interest rate cuts, which can add to unsustainable financial exuberance. It is argued that horizontal exchange rate pegs are the most effective tool to stabilize economies with large net foreign asset positions.

Keywords: international investment position; appreciation-induced risk; exchange rate risk; foreign exchange intervention; monetary policy independence; Switzerland; Japan (search for similar items in EconPapers)
JEL-codes: F15 F31 F33 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_5624

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