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Risk-off Episodes and Swiss Franc Appreciation: the Role of Capital Flows

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  • Irineu de Carvalho Filho

    ()
    (International Monetary Fund)

Abstract

During episodes of increased global risk aversion, or risk-off episodes, safe haven currencies such as the Swiss franc tend to appreciate. The immediate impact of a risk-off shock is an increase in net private inflows to Switzerland, mostly driven by a reduction in Swiss residents’ net purchases of foreign debt securities and reduced foreign exposure by Swiss banks: Over several quarters, risk-off episodes also appear to be related to reductions in net FDI outflows by Swiss residents. Given that the bulk of capital movements related to risk-off episodes is driven by decisions of Swiss residents, capital flow management policies that discriminate based on the residency of the investor (capital controls) are not likely to be effective at reducing the impact of risk-off episodes. However, prudential policies that limit leveraging or foreign exposure by Swiss banks may diminish the volatility of capital flows during risk-off episodes.

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Bibliographic Info

Paper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 13.07.

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Length: 35 pages
Date of creation: Jul 2013
Date of revision:
Handle: RePEc:szg:worpap:1307

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References

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  1. Habib, Maurizio Michael & Stracca, Livio, 2011. "Getting beyond carry trade: what makes a safe haven currency?," Working Paper Series 1288, European Central Bank.
  2. Geert Bekaert & Marie Hoerova & Marco Lo Duca, 2012. "Risk, uncertainty and monetary policy," Working Paper Research 229, National Bank of Belgium.
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  5. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
  6. Reinout De Bock & Irineu E. Carvalho Filho, 2013. "The Behavior of Currencies during Risk-off Episodes," IMF Working Papers 13/8, International Monetary Fund.
  7. Valentina Bruno & Hyun Song Shin, 2013. "Assessing Macroprudential Policies: Case of Korea," Working Papers 1470, Princeton University, Department of Economics, Center for Economic Policy Studies..
  8. Romer, Christina D. & Romer, David H., 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," Department of Economics, Working Paper Series qt5h07k8vf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  9. Mathias Hoffmann & Rahel Suter, 2010. "The Swiss Franc Exchange Rate and Deviations from Uncovered Interest Parity: Global vs Domestic Factors," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 146(I), pages 349-371, March.
  10. Jonathan David Ostry & Mahvash Saeed Qureshi & Karl Friedrich Habermeier & Dennis B. S. Reinhardt & Marcos Chamon & Atish R. Ghosh, 2010. "Capital Inflows: The Role of Controls," IMF Staff Position Notes 2010/04, International Monetary Fund.
  11. Carlos Lenz & Marcel Savioz, 2009. "Monetary determinants of the Swiss franc," Working Papers 2009-16, Swiss National Bank.
  12. Valentina Bruno & Hyun Song Shin, 2013. "Assessing Macroprudential Policies: Case of Korea," NBER Working Papers 19084, National Bureau of Economic Research, Inc.
  13. Marcos Chamon & Marcio Garcia, 2013. "Capital controls in Brazil: effective?," Textos para discussão 606, Department of Economics PUC-Rio (Brazil).
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Cited by:
  1. Reinout De Bock & Irineu E. Carvalho Filho, 2013. "The Behavior of Currencies during Risk-off Episodes," IMF Working Papers 13/8, International Monetary Fund.

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