Is Switzerland an Interest Rate Island after All? Time Series and Non-Linear Switching Regime Evidence

30 Pages Posted: 22 Dec 2015

See all articles by Lars P. Feld

Lars P. Feld

Walter Eucken Institute; University of Freiburg - College of Economics and Behavioral Sciences; CESifo (Center for Economic Studies and Ifo Institute)

Ekkehard A. Koehler

Walter Eucken Institute; University of Freiburg - College of Economics and Behavioral Sciences

Date Written: November 2015

Abstract

Has the “Swiss interest rate anomaly” persisted after the financial crisis? Regarding the hypothesis that the Swiss interest rate anomaly results from systemic risk anticipation, we discuss whether Switzerland remains an interest rate island in the wake of the financial crisis. We find evidence for the demise of the interest rate bonus of the Swiss franc (CHF) vis-à-vis the Euro (EUR) after the Swiss National Bank (SNB) started to advocate an exchange rate floor with the Euro. After the compression of the bonus to insignificant levels, the uncovered interest parity (UIRP) holds again. We find evidence for a recent regime switch after the SNB has discontinued the exchange rate floor with the Euro.

Keywords: uncovered interest rate parity (UIRP), Swiss interest rate anomaly, error correction, heteroscedasticity, Markov regime switching

JEL Classification: E420, E430, F430, G150

Suggested Citation

Feld, Lars P. and Koehler, Ekkehard A., Is Switzerland an Interest Rate Island after All? Time Series and Non-Linear Switching Regime Evidence (November 2015). CESifo Working Paper Series No. 5628, Available at SSRN: https://ssrn.com/abstract=2706513

Lars P. Feld (Contact Author)

Walter Eucken Institute ( email )

Goethestrasse 10
Freiburg im Breisgau, Baden-Württemberg D-79100
Germany

University of Freiburg - College of Economics and Behavioral Sciences ( email )

Freiburg, D-79085
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Ekkehard A. Koehler

Walter Eucken Institute ( email )

Goethestrasse 10
Freiburg, 79100
Germany

University of Freiburg - College of Economics and Behavioral Sciences ( email )

Freiburg, D-79085
Germany

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