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Possible Effects of European Monetary Union on Switzerland; A Case Study of Policy Dilemmas Caused by Low Inflation and the Nominal Interest Rate Floor

Author

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  • Douglas Laxton
  • Eswar S Prasad

Abstract

This paper examines the possible effects on Switzerland of asset preference shifts in favor of Swiss-franc-denominated assets that could result from EMU. Alternative policy responses to temporary and persistent asset preference shifts and the consequent pressures for exchange rate appreciation are examined. Simulations of a stylized macroeconomic model of the Swiss economy indicate that monetary policy is likely to be the most effective tool for stabilizing output in the short run, but at the cost of a temporary increase in inflationary pressures. The simulations highlight the dilemmas faced by policymakers in an environment with low inflation and nominal interest rates.

Suggested Citation

  • Douglas Laxton & Eswar S Prasad, 1997. "Possible Effects of European Monetary Union on Switzerland; A Case Study of Policy Dilemmas Caused by Low Inflation and the Nominal Interest Rate Floor," IMF Working Papers 97/23, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:97/23
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    Citations

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    Cited by:

    1. Coenen Günter & Orphanides Athanasios & Wieland Volker, 2004. "Price Stability and Monetary Policy Effectiveness when Nominal Interest Rates are Bounded at Zero," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-25, February.
    2. Günter Coenen & Volker W. Wieland, 2004. "Exchange-Rate Policy and the Zero Bound on Nominal Interest Rates," American Economic Review, American Economic Association, vol. 94(2), pages 80-84, May.
    3. L.J. Christiano & C.J. Gust, 1999. "Taylor Rules in a Limited Participation Model," DNB Staff Reports (discontinued) 33, Netherlands Central Bank.
    4. Patricia S. Pollard, 2001. "The creation of the Euro and the role of the dollar in international markets," Review, Federal Reserve Bank of St. Louis, issue May, pages 17-36.
    5. Coenen, Gunter & Wieland, Volker, 2003. "The zero-interest-rate bound and the role of the exchange rate for monetary policy in Japan," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1071-1101, July.
    6. Coenen, Gunter & Wieland, Volker, 2004. "Exchange-rate policy and the zero bound on nominal interest rates," MPRA Paper 76687, University Library of Munich, Germany.
    7. Benjamin Hunt & Douglas Laxton, 2004. "The Zero Interest Rate Floor (ZIF) and its Implications for Monetary Policy in Japan," National Institute Economic Review, National Institute of Economic and Social Research, vol. 187(1), pages 76-92, January.
    8. Peter A. Tinsley, 1998. "Short rate expectations, term premiums, and central bank use of derivatives to reduce policy uncertainty," Finance and Economics Discussion Series 1999-14, Board of Governors of the Federal Reserve System (U.S.).

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