Possible Effects of European Monetary Union on Switzerland: A Case Study of Policy Dilemmas Caused by Low Inflation and the Nominal Interest Rate Floor

Douglas Laxton and Eswar Prasad

No 1997/023, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the possible effects on Switzerland of asset preference shifts in favor of Swiss-franc-denominated assets that could result from EMU. Alternative policy responses to temporary and persistent asset preference shifts and the consequent pressures for exchange rate appreciation are examined. Simulations of a stylized macroeconomic model of the Swiss economy indicate that monetary policy is likely to be the most effective tool for stabilizing output in the short run, but at the cost of a temporary increase in inflationary pressures. The simulations highlight the dilemmas faced by policymakers in an environment with low inflation and nominal interest rates.

Keywords: WP; interest rate; monetary policy; exchange rate; Switzerland; nominal interest rate; EMU; nonlinearities; policy simulations; nominal exchange rate; interest rate response; exchange rate appreciation; Phillips curve; open economy; Exchange rates; Short term interest rates; Real exchange rates; Inflation; Interest rate parity; Europe; Global (search for similar items in EconPapers)
Pages: 33
Date: 1997-03-01
References: Add references at CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=2117 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1997/023

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().