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Why are Switzerland's foreign assets so low? The growing financial exposure of a small open economy

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Author Info
Nicolas Stoffels
Cédric Tille

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Abstract

Switzerland's international investment position shows a puzzling feature since 1999: Large and persistent current account surpluses have failed to boost the value of Swiss foreign assets. In this paper, we link this pattern to the substantial increase in the leveraging of Switzerland's international assets and liabilities over the last twenty years, which we document in detail. We estimate the impact of exchange rate and asset prices movements on Swiss net foreign assets, and show that they led to substantial valuations losses since 1999, accounting for between one-quarter and one-half of the gap between the net foreign assets and cumulated current account flows. We show how these adverse valuation effects have erased Switzerland's advantage in terms of the yield on its net foreign asset position.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 283.

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Date of creation: 2007
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Handle: RePEc:fip:fednsr:283

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Keywords: Capital movements ; International finance ; International economic integration ; Switzerland ; Assets (Accounting);

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References listed on IDEAS
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  1. Matthew Higgins & Thomas Klitgaard & Cedric Tille, 2005. "The income implications of rising U.S. international liabilities," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Dec. [Downloadable!]
  2. Gian Maria Milesi-Ferretti & Philip R. Lane, 2007. "Europe and Global Imbalances," IMF Working Papers 07/144, International Monetary Fund. [Downloadable!]
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  3. Maurice Obstfeld, 2004. "External Adjustment," NBER Working Papers 10843, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Peter Kugler & Beatrice Weder, 2004. "International Portfolio Holdings and Swiss Franc Asset Returns," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(III), pages 301-325, September. [Downloadable!]
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  5. Cedric Tille, 2005. "Financial integration and the wealth effect of exchange rate fluctuations," Staff Reports 226, Federal Reserve Bank of New York. [Downloadable!]
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  6. Alexandra Heath, 2007. "What explains the US net income balance?," BIS Working Papers 223, Bank for International Settlements. [Downloadable!]
  7. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "From World Banker to World Venture Capitalist: US External Adjustment and The Exorbitant Privilege," CEPR Discussion Papers 5220, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  8. Gian Maria Milesi-Ferretti & Philip R. Lane, 2005. "A Global Perspective on External Positions," IMF Working Papers 05/161, International Monetary Fund. [Downloadable!]
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  9. Kugler, Peter & Weder di Mauro, Beatrice, 2005. "Why Are Returns on Swiss Franc Assets So Low? Rare Events May Solve the Puzzle," CEPR Discussion Papers 5181, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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