Foreign Currency Denominated Assets and International Shock Absorption in Switzerland and Japan

32 Pages Posted: 22 Dec 2015  

Gunther Schnabl

University of Leipzig - Institute for Economic Policy

Date Written: November 2015

Abstract

Currencies of countries with persistent current account surpluses and high foreign currency denominated assets such as the Swiss franc and Japanese yen are under a persistent appreciation pressure, what restricts the degree of freedom in the choice of exchange rate regime. Official announcements (implicit communication) of appreciations can trigger runs into the domestic currency, which make appreciation expectations self-fulfilling. The resulting negative growth effect is likely to trigger interest rate cuts, which can add to unsustainable financial exuberance. It is argued that horizontal exchange rate pegs are the most effective tool to stabilize economies with large net foreign asset positions.

Keywords: international investment position, appreciation-induced risk, exchange rate risk, foreign exchange intervention, monetary policy independence, Switzerland, Japan

JEL Classification: F150, F310, F330

Suggested Citation

Schnabl, Gunther, Foreign Currency Denominated Assets and International Shock Absorption in Switzerland and Japan (November 2015). CESifo Working Paper Series No. 5624. Available at SSRN: https://ssrn.com/abstract=2706494

Gunther Schnabl (Contact Author)

University of Leipzig - Institute for Economic Policy ( email )

Institute for Economic Policy
Grimmaische Stra├če 12
Leipzig, 04109
Germany

HOME PAGE: http://www.wifa.uni-leipzig.de/iwp/

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