85th International Atlantic Economic Conference

March 14 - 17, 2018 | London, United Kingdom

The impact of a Forex (FX)-shock on a small open economy: Case of Switzerland

Thursday, 15 March 2018: 9:30 AM
Alfred Mettler, Ph.D. , Finance, University of Miami, Coral Gables, FL
On September 6, 2011, the Swiss National Bank (SNB) announced that it would implement a cap on the CHF against the Euro (EUR) at a level of 1.20 Swiss franc (CHF) per EUR. On January 15, 2015, the SNB announced that it would no longer actively support the cap. The cap had been in place for about 3 1/2 years and it had kept the CHF/EUR exchange rate at or above 1.20 CHF per EUR. While the introduction of the cap was quickly absorbed by the financial markets, the decision of the SNB to remove it immediately sent shockwaves through the financial markets, created huge volatility spikes in foreign exchange rates, and affected a wide range of institutions and persons, from hedge funds and banks to homeowners in Eastern Europe who held foreign exchange mortgages, denominated in CHF. Within minutes after the announcement, the CHF appreciated against the USD and the EUR by about 20%.

This paper analyzes the effects of the SNB decision in different ways, based on data provided by Bloomberg and the Swiss National Bank. First, we describe the SNB's motivations for first introducing, and then later removing the cap at these particular times. Second, we specifically analyze the short and medium consequences of the SNB's decision for the Swiss Economy. Third, we show examples of how various governments, states, municipalities, companies, and private citizens who had held Swiss Franc debt were suddenly facing significant changes to interest and principal repayments. Fourth, we look into an accompanying measure the Swiss National Bank took concurrent with the removal of the cap, which was the introduction of negative interest rates.

The last part of the paper analyzes what happened to the Swiss Economy during the following years. One would expect that such a strengthening of a country's currency would severely impact the trade balance by weakening exports and increasing imports. In reality it played out differently, and we show possible reasons for these developments.

The introduction and subsequent removal of the cap by the SNB provides two rare examples of how a shock-like change from a fixed rate to a floating rate regime can affect a country's macroeconomic parameters.