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/Editor:

Douglas Laxton ; Eswar S Prasad

Publication Date:

March 1, 1997

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 97/23

Subject:

English

Publication Date:

March 1, 1997

ISBN/ISSN:

9781451844009/1018-5941

Stock No:

WPIEA0231997

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

33

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