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Monetary Policy Under Low Interest Rates: The Experience of Switzerland in the late 1970s

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  • Peter Kugler
  • Georg Rich

Abstract

This paper addresses the problems arising from the conduct of monetary policy in a lowinterest- rate environment. We examine a proposal advanced by Svensson for current Japanese monetary policy recommending first a devaluation of the Yen and a subsequent temporary exchange rate target coupled with a permanent inflation target. In 1978, after interest rates had already fallen to very low levels, Switzerland faced a threat of deflation, caused by an excessive real upvaluation of the Swiss franc. Considering the low level of interest rates, the SNB decided to react to this shock by pegging temporarily the exchange rate. While the SNB was successful in defusing the exchange rate problems, it could not prevent a resurgence of inflation. The existing literature mentions two possible reasons for the renewed increase in inflation: The SNB may have waited too long in returning to a floating exchange rate and/or its monetary targeting procedures may have been flawed. With the help of a structural VAR model, we explore the reasons for the SNB's failure to preserve low inflation. We determine the policy course the SNB would likely have followed had it attempted to maintain low inflation by relying on inflation forecasts, rather than monetary targets. We conclude that both reasons mentioned above probably account for the resurgence of inflation. However, the VAR-analysis involves an important caveat: Had the SNB returned to a floating exchange rate more quickly and more decisively, it might have reignited the exchange rate turbulences.

Suggested Citation

  • Peter Kugler & Georg Rich, 2002. "Monetary Policy Under Low Interest Rates: The Experience of Switzerland in the late 1970s," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 138(III), pages 241-269, September.
  • Handle: RePEc:ses:arsjes:2002-iii-2
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    References listed on IDEAS

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    1. Leeper, Eric M. & Zha, Tao, 2003. "Modest policy interventions," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1673-1700, November.
    2. Rich, Georg, 2000. "Monetary Policy without Central Bank Money: A Swiss Perspective," International Finance, Wiley Blackwell, vol. 3(3), pages 439-469, November.
    3. Meltzer, Allan-H, 2001. "Monetary Transmission at Low Inflation: Some Clues from Japan in the 1990s," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 13-34, February.
    4. Buttler, H. -J. & Gorgerat, J. -F. & Schiltknecht, H. & Schiltknecht, K., 1979. "A multiplier model for controlling the money stock," Journal of Monetary Economics, Elsevier, vol. 5(3), pages 327-341, July.
    5. Rich, Georg, 1997. "Monetary targets as a policy rule: Lessons from the Swiss experience," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 113-141, June.
    6. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
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    Cited by:

    1. Michael Bordo & Andrew Filardo, 2005. "Deflation and monetary policy in a historical perspective: remembering the past or being condemned to repeat it?," Economic Policy, CEPR;CES;MSH, vol. 20(44), pages 799-844, October.
    2. Kugler, Peter & Jordan, Thomas J. & Lenz, Carlos & Savioz, Marcel R., 2005. "GDP data revisions and forward-looking monetary policy in Switzerland," The North American Journal of Economics and Finance, Elsevier, vol. 16(3), pages 351-372, December.
    3. Gregor Bäurle & Elizabeth Steiner, 2015. "How do Individual Sectors Respond to Macroeconomic Shocks? A Structural Dynamic Factor Approach Applied to Swiss Data," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 151(III), pages 167-225, September.
    4. repec:eee:ecmode:v:70:y:2018:i:c:p:78-86 is not listed on IDEAS

    More about this item

    Keywords

    Monetary Policy; Low Interest Rates; Money Stock Targeting; Inflation Forecast; SVAR;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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