Possible Effects of European Monetary Union on Switzerland: A Case Study of Policy Dilemmas Caused by Low Inflation and the Nominal Interest Rate Floor

March 1, 1997

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Douglas Laxton, and Eswar S Prasad. Possible Effects of European Monetary Union on Switzerland: A Case Study of Policy Dilemmas Caused by Low Inflation and the Nominal Interest Rate Floor, (USA: International Monetary Fund, 1997) accessed November 8, 2024

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.

Subject: Exchange rates, Financial services, Foreign exchange, Inflation, Interest rate parity, Prices, Real exchange rates, Short term interest rates

Keywords: EMU, Europe, Exchange rate, Exchange rate appreciation, Exchange rates, Global, Inflation, Interest rate, Interest rate parity, Interest rate response, Monetary policy, Nominal exchange rate, Nominal interest rate, Nonlinearities, Open economy, Phillips curve, Policy simulations, Real exchange rates, Short term interest rates, Switzerland, WP

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1997/023
Stock No:

WPIEA0231997
ISBN:

9781451844009
ISSN:

1018-5941

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