Negative interest rates in Switzerland: What have we learned?

• Author: Jean‐Pierre Danthine
• Published date: 01 February 2018
• DOI: http://doi.org/10.1111/1468-0106.12251
• Date: 01 February 2018

SPECIAL ISSUE ARTICLE

Negative interest rates in Switzerland: What have

we learned?

Jean-Pierre Danthine

1,2

1

Paris School of Economics, Paris, France

2

CEPR, London, UK

Correspondence

Jean-Pierre Danthine, Paris School of Economics,

48 boulevard Jourdan 75014, Paris, France.

Email: jean-pierre.danthine@psemail.eu

Abstract

The Swiss National Bank introduced negative interest

rates of minus 75 bp in mid-January 2015. Large exemp-

tions on commercial bank holdings at the Swiss National

Bank result in the average rate being significantly less

negative than the marginal rate. With this constellation

the policy transmission to the real economy is asymmet-

ric. It fully satisfies the needs of a small open economy

in search of a negative interest differential, not those of

an economy aiming at a “classical”monetary stimulus at

the zero bound. While the Swiss design would make it

possible to impose rates that are significantly more nega-

tive with modest complementary features, the unpopular-

ity of negative rates makes it likely that the ambition to

totally free monetary policy of the ZLB will, in the near

future, be thwarted by democratic realities.

1|INTRODUCTION

In a small open economy (SOE) the interest rate plays a dual role. On the one hand, as always and

everywhere, it represents the critical intertemporal trade-off, the key signal guiding saving and

investment decisions. On the other hand, it is also the central lever through which the central bank

can exert its influence over the exchange rate. This dual role makes the zero lower bound (ZLB)

doubly constraining for an SOE. The ZLB may prevent the central bank from lowering the interest

rate to the level appropriate to the situation of the domestic macroeconomy. Simultaneously it limits

its capacity to react in the case of an excessively strong exchange rate. In both dimensions, it con-

strains the central bank in its ambition to offer monetary conditions appropriate to the economy.

In reality, however, most small open economies are less constrained than this description sug-

gests because they enjoy (or suffer from) a positive risk premium; that is, their interest rates are

higher than the rates prevailing on similar assets in the major advanced countries. So even when the

major advanced countries find themselves at the ZLB, most SOEs still enjoy some remaining room

for manoeuvre.

Received: 1 December 2016 Accepted: 1 April 2017

DOI: 10.1111/1468-0106.12251

Pac Econ Rev. 2018;23:43–50. wileyonlinelibrary.com/journal/paer © 2018 John Wiley & Sons Australia, Ltd 43