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Foreign Currency Denominated Assets and International Shock Absorption in Switzerland and Japan

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  • Gunther Schnabl

Abstract

Currencies of countries with persistent current account surpluses and high foreign currency denominated assets such as the Swiss franc and Japanese yen are under a persistent appreciation pressure, what restricts the degree of freedom in the choice of exchange rate regime. Official announcements (implicit communication) of appreciations can trigger runs into the domestic currency, which make appreciation expectations self-fulfilling. The resulting negative growth effect is likely to trigger interest rate cuts, which can add to unsustainable financial exuberance. It is argued that horizontal exchange rate pegs are the most effective tool to stabilize economies with large net foreign asset positions.

Suggested Citation

  • Gunther Schnabl, 2015. "Foreign Currency Denominated Assets and International Shock Absorption in Switzerland and Japan," CESifo Working Paper Series 5624, CESifo.
    • Handle: RePEc:ces:ceswps:_5624
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    References listed on IDEAS

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    1. Kappler, Marcus & Reisen, Helmut & Schularick, Moritz & Turkisch, Edouard, 2013. "The Macroeconomic Effects of Large Exchange Rate Appreciations," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 24(3), pages 471-494.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    international investment position; appreciation-induced risk; exchange rate risk; foreign exchange intervention; monetary policy independence; Switzerland; Japan;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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