Who put the Holes in the Swiss Cheese? Currency Crisis Under Appreciation Pressure
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Jan 23, 2018
About this article
Published Online: Jan 23, 2018
Page range: 43 - 57
Received: Jun 12, 2017
Accepted: Jul 10, 2017
DOI: https://doi.org/10.2478/jcbtp-2018-0003
Keywords
© Central Bank of Montenegro
This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.
We examine the reasons why the SNB gave up the lower floor of the 1.20 CHF/EUR exchange rate arrangement. Three types of shocks played a role: Exogenous shocks to the autonomous component of money demand, interest rate decreases of the ECB, as well as appreciation expectations. In order to defend these shocks, the SNB intervened heavily in the foreign exchange market. This led to an accumulation of reserves in the central bank’s balance sheet of the size of 80% of Swiss GDP. Interestingly, the SNB did not lower the interest rate into the negative range during the time period where the peg was in place. Hence, the SNB did not do ”whatever it takes” to defend the peg.