In a Citi research note, Willem Buiter discusses the SNB’s decision to discontinue the exchange rate floor of the Swiss Franc vis-a-vis the Euro. His main points are:
- The removal of the 1.20 floor on the CHF-euro exchange rate was a mistake.
- Superior policy alternatives existed.
- The old regime was indefinitely sustainable.
- Removing the lower bound on nominal interest rates would have been the best choice. This can be done one of three ways.
- The economic damage can be limited by restoring the exchange rate floor at a level not below the old one, and/or by eliminating the lower bound on nominal interest rates.
- The rest of the world can learn from the SNB’s experience with a -0.75% deposit rate.
Tags: exchange rate,Swiss National Bank,Zero lower bound