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What Drives Long-Term Interest Rates? Evidence from the Entire Swiss Franc History 1852-2020

Niko Hauzenberger, Daniel Kaufmann (), Rebecca Stuart () and Cédric Tille ()

No 22-03, IRENE Working Papers from IRENE Institute of Economic Research

Abstract: We study domestic and international drivers of long-term interest rates using newly compiled financial market data for Switzerland starting in 1852. We use a time-varying parameter vector autoregressive model to estimate long-term trends in nominal interest rates, exchange rate growth, and inflation. We then decompose the Swiss long-term interest rate trend into various drivers using an interest rate accounting framework. The decline in long-term interest rates since 1970 is mainly driven by a decline in the level of inflation. Comparing Switzerland with the rest of the world, we show that while Swiss real interest rates were higher during the 19th century, the pattern reversed after World War 2 with Swiss nominal and real rates becoming lower than foreign ones. However, this Swiss “low interest rate island” has disappeared in recent years. We document a connection between inflation risk and the Swiss term spread, as well between relative inflation risk and the difference between Swiss and foreign real interest rates.

Keywords: Natural rate of interest; exchange rate; inflation risk; term spread; uncovered interest parity; historical data (search for similar items in EconPapers)
JEL-codes: E4 E5 F3 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2022-04
New Economics Papers: this item is included in nep-fdg, nep-his, nep-mac, nep-mon and nep-opm
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