Current Account Surpluses and the Interest Rate Island in Switzerland


WP/95/24-EA
Current Account Surpluses and the
Interest Rate Island in Switzerland by Paolo Mauro

This paper describes the various components of the Swiss balance of
payments in historical perspective and compares them to those of other
countries. It also describes the long-run evolution of Switzerland's net
foreign asset position as a proportion of GDP.

Two macroeconomic phenomena make Switzerland stand out among other
countries: first, it has had a persistent current account surplus and the
largest ratio of net foreign assets to GDP in the world; and second, its
real interest rates have been significantly lower than those of most other
industrialized countries, earning it the label interest rate island.

The paper attempts to bring these two distinctive features of the Swiss
economy within a consistent framework. It argues that they may be related,
and that ultimately both may result from an excess of national savings over
investment for many years. The paper also briefly discusses possible
determinants of the Swiss investment and saving ratios, both of which are
high by international standards.

The real interest differential is decomposed into deviations from
uncovered interest rate parity (UIP) and deviations from ex ante relative
purchasing power parity. In common currency terms, assets denominated in
Swiss francs have yielded less than similar safe assets denominated in other
currencies over the past two decades. Thus, the sign and large magnitude of
this deviation from UIP suggest that a foreign exchange rate risk premium
compensates Swiss residents for holding net assets in foreign currency and
foreign residents for bearing net liabilities in Swiss francs.