Vol. 6 No. 3 (2018)
Economic Implications of the Global Financial Crisis

Thematic Articles

Negative Interest Rate Policy in Switzerland

Published 2018-09-23

  • Elisabeth Ziegler-Hasiba
    • ,
  • Ernesto Turnes

Elisabeth Ziegler-Hasiba
University of Applied Sciences FHS St. Gallen 9001 St. Gallen, Switzerland

Ernesto Turnes
University of Applied Sciences St. Gallen

DOI:

https://doi.org/10.15678/EBER.2018.060307

Abstract

Objective: The purpose of this study is to present a review of the negative interest rate policy of the Swiss National Bank (SNB) after the outbreak of the financial crisis, in the context of falling real interest rates. Furthermore, the article demonstrates the implications of this unconventional monetary policy for the Swiss economy as well as the financial market stability.
Research Design & Methods: The study is completely based on literature research. The analysis should be interpreted as being mainly suggestive since empirical research based on a quantitative analysis was not conducted. This article examines and reviews extensive arguments and evidence of 97 scientific articles. The descriptive evidence presented has a strong focus on the situation in Switzerland.
Findings: In economic literature, the discussion about transmission mechanisms of the monetary policy is conducted through several channels: the interest rate channel, the ex-change rate channel and other asset price channels. In Switzerland, the impacts of the negative interest rate policy (NIRP) implemented in 2015 can so far be felt in increasing credits, especially in mortgage claims. The net income of Swiss banks from the commission and service business fell. Moreover, the exchange rate of the Swiss Franc against the Euro could be stabilised to a certain degree.
Implications & Recommendations: A negative interest rate policy has an immediate impact on short-run and long-run interest rates and on banks’ interest rate margins. Currently, monetary policy is taking a turn, especially in the US. However, the leeway for higher rates in Switzerland is limited due to the interest rate differential between short-term Eurozone and Swiss money market rates.
Contribution & Value Added: This article provides insights into the determinants of real interest rates and into the short-run effects of NIRP on the Swiss economy.

Keywords

real interest rates, unconventional monetary policy, monetary transmission channels, asset price bubbles, financial stability

PDF

Author Biography

Elisabeth Ziegler-Hasiba

Professor for Economics

Departement of Business Administration
Rosenbergstrasse 59

References

  1. Alessi, L., & Detken, C. (2009). ‘Real time’ early warning indicators for costly asset price boom/bust cycles: A role for global liquidity (ECB Working Paper No. 1039).
  2. Ando, A., & Modigliani, F. (1963). The ‘life cycle’ hypothesis of saving: Aggregate implications and tests. American Economic Review, 53(1), 55-84.
  3. Arteta, C., Kose, A., Stocker, M., & Taskin, T. (2016). Negative interest rate policies: Sources and implications (CEPR Discussion Paper No. 2DP11433).
  4. Assenmacher-Wesche, K., & Gerlach, S. (2008). Financial structure and the impact of monetary policy on asset prices. Swiss National Bank.
  5. Bean, C.R., Broda, C., Itō, T., & Kroszner, R. (2015). Low for long?: Causes and consequences of persistently low interest rates. CEPR Press.
  6. Bech, M., & Malkhozov, A. (2016). How have central banks implemented negative policy
  7. rates?. BIS Quarterly Review March 2016, Retrieved on August 24, 2018 from http://sep.luiss.it/press-review/2016/04/20/m-bech-and-malkhozov-how-have-central-banks-implemented-negative-policy-rate
  8. Berlemann, M., & Freese, J. (2013). Monetary policy and real estate prices: A disaggregated
  9. analysis for Switzerland. International Economics and Economic Policy, 10(4), 469-490. https://doi.org/10.1007/s10368-012-0222-7
  10. Bernanke, B.S., & Blinder, A.S. (1992). The federal funds rate and the channels of monetary trans-mission. The American Economic Review, 901-921.
  11. Bernanke, B.S., & Gertler, M. (2001). Should central banks respond to movements in asset prices?. American Economic Review, 91(2), 253-257.
  12. Blanchard, O., Furceri, D., & Pescatori, A. (2014). A prolonged period of low real interest rates. CEPR’s Policy Portal.
  13. Blanchard, O. (2016). PB 16-11 Do DSGE Models Have a Future?. (Policy Brief PB 16-11, 2016). Peterson Institute for International Economics.
  14. Blanchard, O. (2017). Macroeconomics. Pearson Education Limited 2017. 7th Edition.
  15. Blot, C., Hubert, P., & Labondance, F. (2017). Does monetary policy generate asset price bubbles?. Observatoire Francais des Conjonctures Economiques (OFCE).
  16. Bofinger, P.G., & Ries, M. (2017). Excess saving and low interest rates: Theory and empirical evi-dence (CEPR Discussion Paper No. DP12111).
  17. Boivin, J., Kiley, M.T., & Mishkin, F.S. (2010). How has the monetary transmission mechanism evolved over time?. In Handbook of Monetary Economics (Vol. 3, pp. 369-422). Elsevier.
  18. Bonk, M.B. (2016). Policies on ageing and health: A selection of innovative models. Mandated by the Swiss Federal Office of Public Health.
  19. Bordo, M.D., & Jeanne, O. (2002). Boom-busts in asset prices, economic instability, and monetary policy (No. w8966). National Bureau of Economic Research.
  20. Bordo, M.D., & Wheelock, D.C. (2004). Monetary policy and asset prices: a look back at past US stock market booms (No. w10704). National Bureau of Economic Research.
  21. Bordo, M.D., Dueker, M.J., & Wheelock, D. C. (2008). Inflation, monetary policy and stock market conditions (No. w14019). National Bureau of Economic Research.
  22. Bordo, M.D., & Landon-Lane, J. (2013). Does expansionary monetary policy cause asset price booms; some historical and empirical evidence (No. w19585). National Bureau of Economic Research.
  23. Borio, C.E., & Lowe, P.W. (2002). Asset prices, financial and monetary stability: Exploring the nex-us. (BIS Working Paper No. 114).
  24. Borio, C., Disyatat, P., & Juselius, M. (2014). A parsimonious approach to incorporating economic information in measures of potential output (BIS Working Paper No. 442).
  25. Borio, C.E., & Hofmann, B. (2017). Is monetary policy less effective when interest rates are persis-tently low? (BIS Working Paper No. 628).
  26. Borio, C., Disyatat, P., Juselius, M., & Rungcharoenkitkul, P. (2017). Why so low for so long? A long-term view of real interest rates. (BIS Working Paper No. 685).
  27. Broadbent, B. (2016). Uncertain times. Speech given at the Wall Street Journal, The News Build-ing, London: Bank of England. Retrieved on August 24, 2018 from https://www.bis.org/review/r161020e.pdf
  28. Brunnermeier, M., & Schnabel, I. (2015). Bubbles and central banks: Historical perspectives (CEPR Discussion Paper No. DP10528).
  29. Carvalho, C., Ferrero, A., & Nechio, F. (2016). Demographics and real interest rates: Inspecting the mechanism. European Economic Review, 88, 208-226.
  30. Cecchetti, S.G., Genberg, H., Lipsky, J., & Wadhwani, S. (2000). Asset prices and central bank poli-cy. Geneva Reports on the World Economy 2.
  31. Christiano, L., Eichenbaum, M., & Evans, C. (1996). The Effects of Monetary Policy Shocks:
  32. Evidence from the Flow of Funds. The Review of Economics and Statistics, 78(1), 16-34. https://doi.org/10.1016/S1574-0048(99)01005-8
  33. Christiano, L.J., Eichenbaum, M., & Evans, C.L. (1999). Monetary policy shocks:
  34. What have we learned and to what end?. Handbook of Macroeconomics, 1, 65-148. https://doi.org/10.1016/S1574-0048(99)01005-8
  35. Christiano, L., Ilut, C., Motto, R., & Rostagno, M. (2007). Monetary policy and stock market boom-bust cycles. Manuscript, Northwestern University.
  36. Christiano, L.J., Eichenbaum, M.S., & Trabandt, M. (2017). On DSGE Models. Retrieved on August 24, 2018 from http://www.wiwiss.fu-berlin.de/en/fachbereich/vwl/trabandt/News/New-Paper-_On-DSGE-Models_.html
  37. Danthine, J.P. (2017). Negative interest rates in Switzerland: What have we learned?. Paris School of Economics and CEPR. April.
  38. Eichengreen, B. (2015). Secular stagnation: the long view. American Economic Review, 105(5), 66-70. https://doi.org/10.1257/aer.p20151104
  39. Fleming, J.M. (1962). Domestic financial policies under fixed and under floating exchange rates. Staff Papers, 9(3), 369-380. https://doi.org/10.2307/3866091
  40. Forbes, K., Kirkham, L., & Theodoridis, K. (2017). A trendy approach to UK inflation dynamics. (Ex-ternal MPC Unit Discussion Paper No. 49). Bank of England.
  41. Friedman, M. (1957). A theory of the consumption function: A study by the National Bureau of Economic Research. Princeton University Press.
  42. Gagnon, E., Johannsen, B.K., & Lopez-Salido, J.D. (2016). Understanding the new normal:
  43. The role of demographics. Finance and Economics Discussion Series, 2016-080. https://doi.org/10.17016/FEDS.2016.080
  44. Galí, J. (2014). Monetary policy and rational asset price bubbles. American Economic Review, 104(3), 721-52.
  45. Gordon, R.J. (2014). The demise of US economic growth: restatement, rebuttal, and reflections (No. w19895). National Bureau of Economic Research.
  46. Hamilton, J.D., Harris, E.S., Hatzius, J., & West, K.D. (2016). The equilibrium real funds rate: Past, present, and future. IMF Economic Review, 64(4), 660-707.
  47. Hannoun, H. (2015). Ultra-low or negative interest rates: what they mean for financial stability and growth. In Remarks by Hervé Hannoun, Deputy General Manager, Bank for International Settlements, at the Eurofi High-Level Seminar, Riga, April (Vol. 22).
  48. Holston, K., Laubach, T., & Williams, J.C. (2017). Measuring the natural rate of interest: Inter-national trends and determinants. Journal of International Economics, 108, 59-75.
  49. Hott, C., & Jokipii, T. (2012). Housing bubbles and interest rates (No. 2012-07). Swiss National Bank.
  50. International Monetary Fund. (2014). World Economic Outlook. April 2014.
  51. International Monetary Fund. (2017). Negative interest rate policies – initial experiences and assessments. IMF Policy Papers.
  52. Issing, O. (2009). Asset prices and monetary policy. Cato J., 29, 45-51.
  53. Johannsen, B.K., & Mertens, E. (2016). A Time Series Model of Interest Rates with the Effective Lower Bound. Finance and Economics Discussion Series, 2016-033. https://doi.org/ 10.17016/FEDS.2016.033
  54. Jordan, T. (2013). Unconventional policy measures in Switzerland. BIS Annual Conference: Navi-gating the Great Recession: What role for monetary policy? Lucerne, 21 June 2013.
  55. Jordan, T. (2016). Monetary policy using negative interest rates: A status report. Speech to the Vereinigung Basler Ökonomen, Basel, 24.
  56. Juselius, M., Borio, C.E., Disyatat, P., & Drehmann, M. (2016). Monetary policy, the
  57. financial cycle and ultralow interest rates. Retrieved on August 24, 2018 from http://www.ijcb.org/journal/ijcb17q3a2.pdf
  58. Justiniano, A., & Primiceri, G.E. (2010). Measuring the equilibrium real interest rate. Economic Perspectives, XXXIV(1), 14-27.
  59. Kohn, D.L. (2007). Monetary policy and asset prices. In Monetary policy: A journey from theory to practice (pp. 43-51). Frankfurt: European Central Bank.
  60. Kohn, D.L. (2009). Monetary policy and asset prices revisited. Cato Journal, 29, 31.
  61. Krugman, P., Obstfeld, M., & Melitz, M. (2014). International economics: Theory and policy. Lon-don: Pearson Global Edition.
  62. Kuttner, K.N. (2011). Monetary policy and asset price volatility: should we refill the Bernanke-Gertler prescription?. In E. Kaufman & A.G. Malliaris (Eds.). New Perspectives on Asset Price Bubbles: Theory, Evidence and Policy (pp. 211-242). Oxford University Press.
  63. Laubach, T., & Williams, J.C. (2015). Measuring the natural rate of interest redux (Working Paper No. 15). Hutchins Center on Fiscal & Monetary Policy.
  64. Lunsford, K., & West, K. (2017). Some evidence on secular drivers of US safe real rates. FRB of Cleve-land (Working Paper No. 17-23).
  65. Maechler, A. (2016). Financial markets and monetary policy implementation – an evolving rela-tion-ship. Money Market Event. Geneva, 17 November 2016.
  66. Mandel, M., & Swanson, B. (2017). The coming productivity boom -Transforming the physical economy with Information. Washington: Technology CEO Council.
  67. Mankiw, G. (2017). Macroeconomics. Worth Publisher.
  68. Mishkin, F.S. (1996). The channels of monetary transmission: lessons for monetary policy (No. w5464). National Bureau of Economic Research.
  69. Mundell, R.A. (1963). Capital mobility and stabilization policy under fixed and flexible exchange rates. Canadian Journal of Economics and Political Science/Revue canadienne de econo-miques et science politique, 29(4), 475-485.
  70. Obstfeld, M., & Rogoff, K. (1996). Foundations of International Macroeconomics. MIT Press.
  71. OECD. (2018). Long-term interest rates (indicator). https://doi.org/10.1787/662d712c-en
  72. Ozkan, M.F.G., & Unsal, D.F. (2014). On the use of monetary and macroprudential policies for small open economies (No. 14-112). International Monetary Fund.
  73. Patinkin, D. (1956). Money, interest, and prices: An integration of monetary and value theory. Row, Peterson.
  74. Pilbeam, K., Bris, A., Alcidi, C., Barslund, M., Pieter de Groen, W., & Gros, D. (2015). Intervention in the foreign exchange market: Rationale, effectiveness, costs and benefits. Intereconomics: Review of European Economic Policy, 50(2), 64-81.
  75. Platen, E., & Semmler, W. (2009). Asset markets and monetary policy (QFRC Research Paper 247).
  76. Rachel, L., & Smith, T. (2015). Are low interest rates here to stay?. (Bank of England Staff Working Paper No. 571).
  77. Reinhart, C.M., & Rogoff, K.S. (2009). This time is different: Eight centuries of financial folly. Princeton University Press.
  78. Rigobon, R., & Sack, B. (2004). The impact of monetary policy on asset prices. Journal of Monetary Economics, 51(8), 1553-1575.
  79. Rohde, L. (2015). Monetary policy, foreign exchange intervention and GDP growth seen rising. Speech at Governor of the DNB, Copenhagen, March 25.
  80. Samuleson, P.A., & Nordhaus, W.D. (2009). Economics. McGraw-Hill Education Ltd., 19th revised edition.
  81. Sims, C.A. (1986). Are forecasting models usable for policy analysis?. Quarterly Review, (Win), 2-16.
  82. Smaghi, L.B. (2009). Monetary policy and asset prices. Opening Address, University of Freiburg, Freiburg, Germany, 14.
  83. Smets, F. (1995). Central bank macroeconometric models and the monetary policy transmission mechanism. BIS Financial structure and the monetary policy transmission mechanism, Basel.
  84. Smets, F. (2014). Financial stability and monetary policy: How closely interlinked?. International Journal of Central Banking, 10(2), 263-300.
  85. Stiglitz, J. (2016). What’s wrong with negative rates?. Project Syndicate, April, 13.
  86. Straubhaar, T. (2015). Should central banks manage the exchange rate?. Intereconomics, 50(3), 161-164. https://doi.org/10.1007/s10272-015-0537-z
  87. Swiss Bankers Association. (2017). Banking Barometer 2017. Economic trends in the Swiss bank-ing industries. August 2017.
  88. Swiss National Bank. (2016). Goals and responsibilities of the Swiss National Bank. Annual Report 2016.
  89. Swiss National Bank. (2016). Banks in Switzerland. Retrieved on August 24, 2018 from www.snb.ch.
  90. Swiss National Bank. (2017). Quarterly Bulletin. December.
  91. Swiss National Bank. (2017). 110th Annual Report. Swiss National Bank.
  92. Swiss National Bank. (2018). Quarterly Bulletin. 1/2018.
  93. Taylor, J.B. (1993). Discretion versus policy rules in practice. In Carnegie-Rochester conference series on public policy (Vol. 39, pp. 195-214). North-Holland.
  94. Taylor, J.B. (1993). Macroeconomic policy in a world economy: From econometric design to practi-cal operation. New York: W.W. Norton & Company.
  95. Thorbecke, W., & Kato, A. (2017). Exchange rates and the Swiss economy. Research Institute of Economy, Trade, and Industry Discussion Paper, (17-E), 064.
  96. Thwaites, G. (2015). Why are real interest rates so low? Secular stagnation and the relative price of investment goods (Bank of England Working Paper No. 564).
  97. Turner, P. (2017). Did central banks cause the last financial crisis? Will they cause the next?. (NIESR Discussion Papers No. 484). National Institute of Economic and Social Research.
  98. Vinals, J., Gray, S., & Eckhold, K. (2016). The broader view: The positive effects of negative nomi-nal interest rates. IMF-Blog, Insights and Analysis on Economics & Finance.
  99. Vlieghe, G. (2017). Real interest rates and risk. In Society of Business Economists’ Annual Confer-ence (Vol. 15).
  100. White, W.R. (2012). Ultra-easy monetary policy and the law of unintended consequences. Real-World Economics Review, 19-56.
  101. Wicksell, K. (1936). Interest and prices. Translation of 1898 edition by RF Kahn.
  102. Williams, J.C. (2003). The natural rate of interest. Federal Reserve Bank of San Francisco. Econom-ic Letter, 32.
  103. Zurbrügg, F. (2015). After the minimum exchange rate: New monetary policy challenges. Money Market Event Zurich, 26 March.

Downloads

Download data is not yet available.