The 'New Normal' of the Swiss Balance of Payments in a Global Perspective: Central Bank Intervention, Global Imbalances and the Rise of Sovereign Wealth Funds

Abstract

Since the global financial crisis, the Swiss National Bank has been accumulating reserve assets amounting to the size of the Swiss GDP. Yet, the Swiss franc is still considered to be significantly over-valued. This paper analyzes the drivers behind the new situation and discusses challenges and opportunities for Swiss policy making, drawing on comparisons with other surplus countries. Our findings are fourfold. First, the recent upward pressure on the Swiss franc cannot be explained by safe haven effects alone, but has been driven by a pronounced decline in Swiss residents’ foreign investments. Second, other surplus countries typically purchase and manage significant amounts of foreign assets via central banks and sovereign wealth funds. Third, from a global perspective, such public intervention is subject to a mercantilist critique. Fourth, given the need to invest in the real economy to foster growth and avoid the present excess flushing of the financial system that boost asset prices in an insufficient productive way, we conclude that Switzerland should assess room for re-balancing and highlight the opportunity of building a Swiss sovereign wealth fund. This would be beneficial both for Swiss residents and for the world at large.

Keywords: Surplus Countries, Central Bank Interventions, Sovereign Wealth Funds, Mercantilist Critique, Swiss Franc, Current Account Imbalance

JEL Classification: E5, F31, F32, O24