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Claremont McKenna College

Publication Date

Fall 2023

Program Name

Switzerland: Banking, Finance, and Social Responsibility

Abstract

Monetary policy is one of the most important tools that a government has to influence its economy. This means the ability for a country to determine their own monetary policy is important to that country’s autonomy. Switzerland has consistently based its decisions on what would afford it the highest level of autonomy, including the decision not to join the European Union and subsequently the decision to retain their own currency.

The Swiss National Bank retains the mandate to keep price levels (inflation) stable, but it is challenged by an appreciating currency. Because the Swiss Franc is a safe-haven currency, money flows into the country during times of volatility or uncertainty in global financial markets, most notably after the global financial crisis and subsequent European sovereign debt crisis in the early 2010s. This results in an appreciation of the Swiss Franc compared to other important currencies, especially the Euro. This paper presents research into the tools that the Swiss National Bank, the central bank of Switzerland, used to protect the Swiss economy during this time of volatility, capital inflows, and currency appreciation.

This paper argues that the SNB used two main unconventional monetary policy tools in response to the currency appreciation: first, a minimum exchange rate to the Euro, which the SNB maintained by buying foreign currency. And second, a negative interest rate, which goes against the conventional monetary policy theory that interest rates must stay at zero or above. While the SNB was not the first to use either of these strategies at the time, their high-profile deployment in the 2010s provide a helpful case study for other countries to follow in times of crisis. The Swiss public is also still affected by the side-effects of both policies.

Disciplines

Accounting | Banking and Finance Law | Economic Policy | International Economics | Macroeconomics

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