From the Swiss National Bank today:
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.
And it´s not the case that Switzerland is in the doldrums the way the US or Europe are. In 2005 both nominal spending and real output began to grow faster in Switzerland. When the Fed made the fatal mistake of letting spending drop after mid 2008, Switzerland was better positioned to absorb the shock.
Unemployment went up a bit but is back below 4%!
And inflation, which was never high, is uncomfortably low, prompting the SNB directive.
The SF/Euro rate is shown in the figure below. After remaining stable since the birth of the Euro, when the crisis took off the SF appreciated continuously, with the rate of appreciation increasing more recently, hence the SNB directive.
Update: David Glasner elaborates on the topic.
Update 2: David Beckworth also opines.
Update 3. Scott Sumner has a comment on the SNB action.
Update (9/7). Josh Hendrickson tackles the question from a monetary equilibrium perspective.
Update (9/8). Nick Rowe uses the gold standard analogy to bring the point home.
Update 4: The power of a clear statement!
Great Post Marcus!
I like the NGDP graph. Is the SNB maybe overdoing it? Probably not if one look at the low inflation level – after all the SNB is targeting inflation and not NGDP.
Lars Initially I thought they overdid. But RGDP also rose above trend beginning in 2005, with inflation “dormant”. Luck of the Swiss to get a boost just before the “world fell apart”!
Marcus, you are of course right. Maybe they overdid it before the crisis, but now it seems like they are back at a new higher NGDP path. I am surely not nervous that they will overstimulate – I think if the SNB begin to any serious increase in inflation above their target then they will scale back monetary easing. SNB has the longest and most successful history in the world of providing nominal stability. And equally important – they act symmetrically – unlike the ECB, which seems bias in deflationary direction.
The last chart speaks for itself. Aim and shoot!
Take a look:
Fed’s Kocherlakota: Economy Does Not Need More Easing
“The data in August did not justify the additional accommodation provided” by the central bank on Aug. 9, Kocherlakota said today in the text of a speech in Minneapolis. “It is unlikely that the data in September will warrant adding still more accommodation.”
I did a post on that!
Rafael, Truly depressing…
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