The puzzle of the Swiss interest rate island: Stylized facts and a new interpretation

Peter Kugler and Beatrice Weder di Mauro

No 168, HWWA Discussion Papers from Hamburg Institute of International Economics (HWWA)

Abstract: This paper contributes to the debate about the puzzle of the Swiss Interest Rate Island. It starts out by establishing some stylized facts about the nature of the puzzle. First it shows that long run real returns on Swiss Euro Deposits have been significantly lower than in any other major currency. A decomposition of return differentials into deviations from uncovered interest rate parity and deviations from purchasing power parity reveals that the former contributes most to the puzzle. Two implications follow from these stylized facts: (i) since the puzzle is present in Euro Deposit rates it cannot be due to local factors such as banking secrecy, and (ii) solutions to the puzzle have to provide an explanation for a long run failure of uncovered interest rate parity rather than for real appreciation. Historical evidence is presented that suggests the puzzle may be attributed to a reverse peso problem. The paper discusses the consequences of this interpretation for Swiss monetary and exchange rate policy.

JEL-codes: E43 E44 G15 (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (14)

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https://www.econstor.eu/bitstream/10419/19330/1/168.pdf (application/pdf)

Related works:
Journal Article: The Puzzle of the Swiss Interest Rate Island: Stylized Facts and a New Interpretation (2002)
Working Paper: The Puzzle of the Swiss Interest Rate Island: Stylized Facts and a New Interpretation (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:hwwadp:26190

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