Swiss Lessons for the Rest of the World

One key issue in the monetary policy debate concerns the power of expectations, and the key piece of evidence on this comes from Switzerland and was recently summed up by Evan Soltas.

I can, however, sum it up even faster. For a while, euro anxiety was leading investors to rush into Swiss Francs as a safe haven which was making Swiss exports uncompetitive. At first, the Swiss National Bank tried to deal with this by using the exchange rate equivalent of quantitative easing—print francs and make large purchases of foreign currency. This didn’t work very well and prompted various articles about the difficulty of using monetary policy to achieve policy goals. But then the SNB switched tactics and simply stated clearly what exchange rate vis-a-vis the euro they were trying to hit.

They backed this up with some purchases, but soon enough they stopped needing to actually make the purchases because investors realized it was pointless to bet against an entity that’s capable of creating arbitrary quantities of Swiss francs with a simple series of keystrokes.

For a large economy like the United States, exchange rate targeting would be a bad idea. But the point is the same. When a central bank declares an explicit nominal target, it will be believed. But quantitative efforts in which the bank says how much it’s willing to spend don’t work. The bank needs to say what it wants to see happen and articulate its determination to do whatever it takes to make it happen. Once that articulation’s in place, it doesn’t take very much.