Lars Christensen recently sent me the following report from the Swiss National Bank:
The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.
The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.
Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.
I don’t have a link, but this Bloomberg news report summarizes the move. A few comments:
1. Swiss stocks rose over 4% on the news, but the gains have been pared back as all markets are falling on recession fears. I’d guess the move was partly expected, and hence the actual impact on the market was much more than 4%. The exchange rate immediately fell by over 7%, to a level close to the target. This suggests that the policy is credible.
2. Unless I’m mistaken, this is close to what Lars Svensson recommended. I’m relying on memory–perhaps a commenter can dig up an old Svensson paper on “foolproof escapes” from a liquidity trap. The key idea is to create expectations of currency depreciation. The final paragraph of the Swiss statement seems to have that aim, although a more specific target path might have been more credible. The idea is to make investors think that the Swiss franc (base money) is not a good investment.
3. I believe the Swiss central bank did the right thing. Whether it’s done enough is hard to say. Open economies like Switzerland (and Sweden) can only do so much in the face of falling demand for their highly specialized exports. If the world continues to slide toward recession, I’d expect both countries to see some decline in output, even with optimal monetary policy. But at a minimum the Swiss can and should prevent deflation trigger by falling demand.
4. The market reaction to the Swiss move is one piece of evidence in support of my recent post arguing that Switzerland was not out of ammunition. One more piece of evidence that money matters–especially when monetary shocks are destabilizing the world economy. But the Swiss still need to carry through with the commitment. And as the statement indicates, even further moves may be necessary.
PS. I wish Lars could convince the Danes to devalue. If enough countries act, maybe the ECB would take a hint.