Woah. Just think about that for a moment. The SNB said in early September, as it solidified its commitment to the currency floor, that "it will no longer tolerate" an overvalued currency and that it will "enforce" its desired exchange rate "with the utmost determination." When all the SNB would have to do is print and sell Swiss franc if it faced a challenge to its currency floor, there's simply no good reason to bet against it. And thus expectations are made. It hasn't had to do anything.Apparently this so-called success provides support for NGDP targeting because it
tells us about the strength of the expectational channel in monetary policy.
On the same day, over at FT Alphaville, Izabella Kaminska had a post on Why Switzerland is the new China in which she notes
A good follow up question: if the SNB is buying large amounts of euros to protect their policy, will NGDP proponents accept the weakness of expectational channels in monetary policy and note the lack of support from this outcome?
keeping the Swiss franc structurally undervalued against the euro is becoming costlier than ever.
The act of having to put its money where its mouth is — via that permanent 1.20 bid — has not only reduced Switzerland to “currency manipulator” status, but also into one of the biggest acquirers of euro-denominated assets in the world.Soltas responds on his blog
I think, respectfully, that Kaminska is wrong.Well, today on Zero Hedge, Bruce Krasting offers the following conversation in his post, Another Bear Awakens (Geneva is a “Swiss banker from Geneva”)
BK – Are you guys still seeing boatloads of money coming in from outside the country?
Geneva – Yes, the money is still coming. In the past two weeks the Swiss National Bank (SNB) was forced to intervene in support of the 1.20 peg. The amounts were big, over EUR 20 billion was purchased.I can’t claim to know how reliable either the sources for Kaminska or Krasting are, but these two stories should at least make one skeptical about Soltas’ initial comment. Concluding the SNB’s policy is a success may be premature.
A good follow up question: if the SNB is buying large amounts of euros to protect their policy, will NGDP proponents accept the weakness of expectational channels in monetary policy and note the lack of support from this outcome?
Evan is future central banker. A central bank trying to enact an exchange rate regime through a policy of commitment and hoping to change/stop people's actions is like putting a "kick me" sign on one's back hoping it stops people from kicking you in the ass.
ReplyDelete>A good follow up question: if the SNB is buying large amounts of euros to protect their policy, will NGDP proponents accept the weakness of expectational channels in monetary policy and note the lack of support from this outcome?
ReplyDeleteUp until this point they have not had to make large scale asset purchases to defend their price floor as the markets have done the work. Having to do so in the future is not necessarily a weakness of the expectations channel. Chuck Norris did have to beat up at least one person before he was viewed as credible threat.
@Ryan Sanchez, I'll agree that recent intervention does not necessarily imply weakness of the expectations channel. While Chuck Norris may have beat up at least one person, he (almost?) always won. From what I know, most fixed currency regimes have ultimately fallen apart with generally negative consequences. If the SNB fails to hold the peg and takes losses on their foreign-currency holdings, will that change your view?
DeleteAs for whether or not they were buying, looks like Evan was wrong. See this post from today for confirmation: SNB Foreign-Currency Holdings Hit Record On Intervention.
"From what I know, most fixed currency regimes have ultimately fallen apart with generally negative consequences. If the SNB fails to hold the peg and takes losses on their foreign-currency holdings, will that change your view?"
ReplyDeleteNot in this direction. Net export nations can hold the peg until the Net import nations finally die.
Primarily because the net import nations are controlled by neo-classical economic theory and therefore won't offset the foreign central banks manipulation by refusing to allow them to buy interest paying government assets.
@Neil Wilson - Thanks for commenting. I really appreciate your work and have been hoping you might get back to blogging more often soon!
DeleteAs I just noted over at Mike Norman Economics, this portion was obviously not written clearly. I understand and agree with your point. My comment about the ability of the SNB to maintain its stance is more about the political/independence aspect. IMO, there may be some level of fx reserves (essentially euros) that the SNB acquires at which point Swiss politicians become nervous about the implications and pressure the SNB to remove its floor. Ultimately this is just speculation that may prove equally untrue or may represent a real (though not operational) constraint on CB policy.
Weakness? What weakness?
ReplyDeleteHere's the thing: there is literally nothing which can be done to stop the SNB from printing francs. What does it have to fear? Possible endgame: SNB owns huge piles of euros. So what? Worst case they become worthless. Also, foreigners hold huge numbers of Swiss francs. Again, so what?
I'm actually having trouble coming up with a potential problem scenario -- perhaps after the Eurozone collapses, everyone holding Swiss francs suddenly comes in and attempts to buy things from Switzerland with them, pricing the native Swiss out of the market and creating a sudden wave of very high inflation. That's the ONLY "downside" scenario I can think of and it doesn't sound likely....