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The Short-Run Impact of Interest Rates on Exchange Rates: Results for the Swiss franc Against the Euro and US Dollar from Daily Data 2001-2011

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  • Kugler, Peter

    (University of Basel)

Abstract

This paper provides an econometric analysis of the short-run impact of interest rates on the Swiss franc exchange rate covering the period January 2001 to June 2011 using daily data. Our model includes both the exchange rate of the Swiss franc against euro and dollar and uses the plausible assumption that foreign interest rates and the euro-dollar exchange rate are exogenous. In addition, we consider not only money market interest differentials, but also those for 2 and 10 year governments bonds. GMM estimation indicates that a one-percentage point increase in the 3-month Swiss franc Libor rate leads to a 3.7 % appreciation of the Swiss franc against euro and dollar. This result seems to be robust with respect to considering only increasing or decreasing interest rates and omitting data around SNB target band adjustments. Our findings appear reasonable and are between the extremely low and high estimates of the impact of Swiss interest rate changes on the exchange rate reported in the literature.

Suggested Citation

  • Kugler, Peter, 2020. "The Short-Run Impact of Interest Rates on Exchange Rates: Results for the Swiss franc Against the Euro and US Dollar from Daily Data 2001-2011," Working papers 2020/01, Faculty of Business and Economics - University of Basel.
    • Handle: RePEc:bsl:wpaper:2020/01
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    References listed on IDEAS

    as
    1. Jonathan Kearns & Phil Manners, 2006. "The Impact of Monetary Policy on the Exchange Rate: A Study Using Intraday Data," International Journal of Central Banking, International Journal of Central Banking, vol. 2(4), December.
    2. Ferrari, Massimo & Kearns, Jonathan & Schrimpf, Andreas, 2021. "Monetary policy’s rising FX impact in the era of ultra-low rates," Journal of Banking & Finance, Elsevier, vol. 129(C).
    3. Kerssenfischer, Mark, 2019. "Information Effects of Euro Area Monetary Policy: New evidence from high-frequency futures data," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203524, Verein für Socialpolitik / German Economic Association.
    4. Rosa, Carlo, 2011. "The high-frequency response of exchange rates to monetary policy actions and statements," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 478-489, February.
    5. Ranaldo, Angelo & Rossi, Enzo, 2010. "The reaction of asset markets to Swiss National Bank communication," Journal of International Money and Finance, Elsevier, vol. 29(3), pages 486-503, April.
    6. Dr. Christian Grisse, 2020. "The effect of monetary policy on the Swiss franc: an SVAR approach," Working Papers 2020-02, Swiss National Bank.
    7. Fabio Canetg & Daniel Kaufmann, 2019. "Shocking Interest Rate Floors," IRENE Working Papers 19-02, IRENE Institute of Economic Research.
    8. Dr. Fabian Fink & Dr. Lukas Frei & Dr. Thomas Maag & Dr. Tanja Zehnder, 2020. "The impact of SNB monetary policy on the Swiss franc and longer-term interest rates," Working Papers 2020-01, Swiss National Bank.
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    Cited by:

    1. Dr. Christian Grisse, 2020. "The effect of monetary policy on the Swiss franc: an SVAR approach," Working Papers 2020-02, Swiss National Bank.
    2. Dr. Fabian Fink & Dr. Lukas Frei & Dr. Thomas Maag & Dr. Tanja Zehnder, 2020. "The impact of SNB monetary policy on the Swiss franc and longer-term interest rates," Working Papers 2020-01, Swiss National Bank.

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    More about this item

    Keywords

    Interest rates; money and bond market; exchange rates; GMM-estimation;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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