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Is Switzerland an Interest Rate Island after all? Time Series and Non-Linear Switching Regime Evidence

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  • Lars P. Feld
  • Ekkehard A. Köhler

Abstract

Has the “Swiss interest rate anomaly” persisted after the financial crisis? Regarding the hypothesis that the Swiss interest rate anomaly results from systemic risk anticipation, we discuss whether Switzerland remains an interest rate island in the wake of the financial crisis. We find evidence for the demise of the interest rate bonus of the Swiss franc (CHF) vis-à-vis the Euro (EUR) after the Swiss National Bank (SNB) started to advocate an exchange rate floor with the Euro. After the compression of the bonus to insignificant levels, the uncovered interest parity (UIRP) holds again. We find evidence for a recent regime switch after the SNB has discontinued the exchange rate floor with the Euro.

Suggested Citation

  • 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.
    • Handle: RePEc:ces:ceswps:_5628
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    1. Gianfranco Zampese, 2017. "Taylor Rule and Financial Instability," BAFFI CAREFIN Working Papers 1757, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

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    More about this item

    Keywords

    uncovered interest rate parity (UIRP); Swiss interest rate anomaly; error correction; heteroscedasticity; Markov regime switching;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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