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The Puzzle of the Swiss Interest Rate Island: Stylized Facts and a New Interpretation

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  • Kugler, Peter
  • Weder, Beatrice

Abstract

This paper contributes to the debate about the puzzle of the Swiss Interest Rate Island. It starts out by establishing some stylized facts about the nature of the puzzle. First it shows that long run real returns on Swiss Euro Deposits have been significantly lower than in any other major currency. A decomposition of return differentials into deviations from uncovered interest rate parity and deviations from purchasing power parity reveals that the former contributes most to the puzzle. Two implications follow from these stylized facts: (i) since the puzzle is present in Euro Deposit rates it cannot be due to local factors such as banking secrecy, and (ii) solutions to the puzzle have to provide an explanation for a long run failure of uncovered interest rate parity rather than for real appreciation. Historical evidence is presented that suggests the puzzle may be attributed to a reverse peso problem. The paper discusses the consequences of this interpretation for Swiss monetary and exchange rate policy. Diese Arbeit leistet einen Beitrag zu der Debatte über das Rätsel "Zinsinsel Schweiz" indem es stilisierte Fakten über die Natur dieses Rätsels dokumentiert. Als erstes wird aufgezeigt, dass die langfristigen realen Erträge auf Schweizer Euro Einlagen deutlich niedriger waren als in anderen Hauptwährungen. Eine Zerlegung der Ertragsunterschiede in Abweichungen von der ungedeckten Zinsparität und Abweichungen von Kaufkraftparität enthüllt, dass der erste Faktor den Hauptanteil am Rätsel trägt. Zwei Folgerungen ergeben sich daraus: (i) nachdem sich dieses Rätsel in Euro Einlagen zeigt, kann es nicht durch nationale Eigenschaften wie z.B. das Bankgeheimnis verursacht werden, und (ii) Lösungen für dieses Rätsel müssen eine Erklärung für das langfristige Versagen der ungedeckten Zinsparität liefern und nicht für die reale Wertsteigerung. Aufgrund von historischen Datenreihen folgern wir, dass das Rätsel auf ein "Peso Problem" zurückzuführen ist und diskutieren die Konsequenzen für die schweizerische Geld- und Wechselkurspolitik.

Suggested Citation

  • Kugler, Peter & Weder, Beatrice, 2002. "The Puzzle of the Swiss Interest Rate Island: Stylized Facts and a New Interpretation," Discussion Paper Series 26190, Hamburg Institute of International Economics.
    • Handle: RePEc:ags:hwwadp:26190
    DOI: 10.22004/ag.econ.26190
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    References listed on IDEAS

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    1. McCallum, Bennett T., 1994. "A reconsideration of the uncovered interest parity relationship," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 105-132, February.
    2. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2001. "The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries," Journal of International Economics, Elsevier, vol. 55(2), pages 263-294, December.
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    4. Mr. Paolo Mauro, 1995. "Current Account Surpluses and the Interest Rate Island in Switzerland," IMF Working Papers 1995/024, International Monetary Fund.
    5. Lane, Philip & Milesi-Ferretti, Gian Maria, "undated". "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
    6. Kugler, Peter, 2000. "The expectations hypothesis of the term structure of interest rates, open interest rate parity and central bank policy reaction," Economics Letters, Elsevier, vol. 66(2), pages 209-214, February.
    7. Michael D. Bordo & Anna J. Schwartz, 1994. "The Specie Standard as a Contingent Rule: Some Evidence for Core and Peripheral Countries, 1880-1990," NBER Working Papers 4860, National Bureau of Economic Research, Inc.
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    Cited by:

    1. David R. Haab & Thomas Nitschka, 2020. "Carry trade and forward premium puzzle from the perspective of a safe‐haven currency," Review of International Economics, Wiley Blackwell, vol. 28(2), pages 376-394, May.
    2. 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.
    3. Lars P. Feld & Ekkehard A. Köhler, 2015. "Is Switzerland an Interest Rate Island after all? Time Series and Non-Linear Switching Regime Evidence," CESifo Working Paper Series 5628, CESifo.
    4. Kleiber Christian & Zeileis Achim, 2013. "Reproducible Econometric Simulations," Journal of Econometric Methods, De Gruyter, vol. 2(1), pages 89-99, July.
    5. Ernst Baltensperger & Peter Kugler, 2016. "The historical origins of the safe haven status of the Swiss franc:," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 67(02), pages 1-30, August.
    6. Kugler, Peter & Weder, Beatrice, 2009. "The Demise of the Swiss Interest Rate Puzzle," Working papers 2009/04, Faculty of Business and Economics - University of Basel.
    7. Niko Hauzenberger & Daniel Kaufmann & Rebecca Stuart & Cédric Tille, 2022. "What Drives Long-Term Interest Rates? Evidence from the Entire Swiss Franc History 1852-2020," IRENE Working Papers 22-03, IRENE Institute of Economic Research.
    8. 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.
    9. Bruno Thiago Tomio & Guillaume Vallet, 2021. "Carry Trade and Negative Policy Rates in Switzerland : Low-lying fog or storm ?," Post-Print halshs-03669561, HAL.
    10. Christoph Sax, 2006. "Interest Rates and Exchange Rate Movements: Analyzing Short-term Investments in Long-term Bonds," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 20(2), pages 205-220, June.
    11. Butler, Monika & Ruesch, Martin, 2007. "Annuities in Switzerland," Policy Research Working Paper Series 4438, The World Bank.
    12. 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.
    13. Daniel Kaufmann, 2019. "Nominal stability over two centuries," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 155(1), pages 1-23, December.
    14. Mile Bošnjak, 2018. "Swiss Franc from the Croatian Perspective," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 7(3), pages 41-56.

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    More about this item

    Keywords

    Financial Economics;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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