Endogenous money interpretation of the operations of the Swiss central bank (2005-2020)

The present article deals with the evolution of the operational framework of the Swiss central bank, brought forward by its extensive official foreign exchange purchases following the outburst of the global financial crisis. It provides an endogenous money interpretation of the operations of the Swiss National Bank under both shortage and surplus in the aggregate liquidity position of the banking sector vis-à-vis the central bank, reinforcing thus the claim that the compensating movements on the central bank balance sheet in response to foreign exchange accumulation are nothing more than interest rate targeting operations. Given the rather unusual choice of a longer-term interest rate abroad as its policy rate, initially the SNB only partially compensated these movements, so as to ensure a rather generous supply of central bank reserves and bring this rate down to its targeted level, while domestic market rates were set lower. The later adoption of a floor system with ample reserves, allowed the SNB to maintain a near-perfect control over its policy interest rate while at the same time establishing a direct link between foreign reserves and the monetary base, leaving little room to assume a further quantitative effect from this expansion of central bank reserves.