Forex intervention and reserve management in Switzerland and Israel since the financial crisis: Comparison and policy lessons

This paper compares the appreciation pressures on the currencies of the two countries, documents the similarities and differences between their methods of interventions and discusses their consequences for the size of forex reserve accumulation and their management. It is argued that the differences in methods of intervention and in the magnitude of reserve accumulation should be understood within the larger context of differences in the monetary policies of the Swiss National Bank (SNB) and of the Bank of Israel (BOI) including, in particular, the fact that the SNB hit the zero lower bound earlier than the BOI and has maintained a negative rate for some time. The paper discusses the structural differences in inflation, growth, openness, and safe haven considerations that are responsible for those difference in monetary policies. Following a comparison of the effectiveness of “strong†and discretionary interventions in the two countries the paper discusses the pros and cons of forex interventions by small open economies faced with large trading partners whose policy rates are at or below the ZLB and who engage in large scale asset purchases. Sustained periods of intervention lead to large reserve accumulations that ultimately raise questions about potential costs of large reserves. The paper critically examines conventional views about such costs, the related accounting methods used to quantify them and proposes institutional changes designed to ameliorate the tradeoff between leaning against appreciations and “excessive†reserve accumulation. In this context the experience of Switzerland and of the Norwegian sovereign wealth fund is particularly relevant for Israel.