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So the SNB got tired of pegging the Swiss franc, and shrugged. A gesture. They insist it was a successful policy, which was no longer needed. But consider the following from Gavyn Davies:

The SNB balance sheet at the end of December was about 85 per cent of GDP, mostly in foreign currencies, and we do not know whether this has increased markedly during the bout of euro weakness in January. The SNB’s mark-to-market currency losses on Thursday were probably around 13 per cent of GDP (SFr75bn). Paul Meggyesi of JPMorgan says that “the SNB would have been bankrupted by this de-pegging had it not made such a large profit last year”. The SFr38bn profit in 2014 was announced only last week, which is surely not a coincidence. Many economists believe that balance sheet losses are irrelevant for a central bank, so they should play no role in policy. But the SNB is 45 per cent owned by private shareholders, many of whom are individuals, who receive dividends from the SNB. The rest is owned by the cantons, which have been complaining recently about insufficient cash transfers from the SNB.

Losses of 13% of GDP are pretty significant. And contrary to the claim of the SNB, Switzerland today is far worse off than in 2011, right before the currency was pegged. The SF is far more overvalued, having risen an astounding 21% in just a few days. And Switzerland was experiencing deflation at the previous exchange rate of 1.20!

Robert Lucas kept emphasizing that we need to think in terms of policy regimes, not discretionary decisions at a point in time. And this is what defenders of the SNB miss. They don’t have a cohesive regime in place. It’s almost impossible to figure out what they are trying to accomplish. Even if we assume that political constraints put them in a difficult position (a hypothesis I am willing to entertain), the past 4 years of SNB policy are not defensible as making the best of a bad situation. For instance, why wait until the peg is broken before lowering the interest rate to negative 0.75%? (Insert horse/barn door analogy here.)

If the SNB was having trouble meeting its conflicting mandates, then it should have gone to the government long ago to discuss options. Instead it blindsided the government with a panicky move.

A policy rule worked very well for 3 and 1/3 years, delivering good macroeconomic outcomes. Then the SNB switched to a discretionary regime and promptly lost 75 billion SF. Don’t blame the policy rule.

Yes, some bad things might have happened if the peg had been maintained, but nothing like the bad things that are about to happen.

There’s a reason markets didn’t expect this—it’s a really dumb move.

PS. Of course I think NGDP targeting is far better than a fixed exchange rate regime, but there are things far worse than either.

HT: Tyler Cowen

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This entry was posted on January 18th, 2015 and is filed under Monetary Policy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



