A Central Bank “Does Nothing”, Swiss Edition
It’s important to remember that the supposedly “orthodox” interpretation of the liquidity trap theory predicts that it was impossible for the Swiss National Bank to devalue the Swiss Franc in 2011. Monetary policy is all about interest rates, and when you have run out of interest rates, as the SNB had, there is nothing for your highly-paid central bankers to do. Perhaps they can meet up every now and then, and write a strongly-worded letter asking for fiscal stimulus if the expected path for inflation is a too low.
Here is how Reuters report the SNB doing nothing this morning:
The Swiss National Bank shocked financial markets on Thursday by scrapping a three-year-old cap on the franc, sending the safe-haven currency soaring against the euro and stocks plunging amid fears for the export-reliant Swiss economy.
Only days ago, SNB officials had described the 1.20 francs per euro cap, introduced in 2011 at the height of the euro zone crisis to prevent the strong currency leading to deflation and a recession, as the cornerstone of the bank’s monetary policy.
The U-turn sent the franc nearly 30 percent higher against euro in chaotic early trading. It came a week before the European Central Bank is expected to unveil a massive bond-buying program that might have forced the SNB to intervene repeatedly to defend the cap.
We’ve also been told a few times that currency devaluation is zero-sum (since global aggregate demand is fixed), and so I presume the European economy will get a welcome boost from the devaluation of the Euro against the Franc. I suppose somebody, somewhere, is celebrating that the Swiss have stopped “sucking demand out of the world economy”?
Lars Svensson’s Foolproof Way has always seemed like the best option for the SNB to me.