When the Swiss National Bank (SNB) recently brought its interest rate down to 0.25 percent, it announced that it would engage in “quantitative easing,” following in the footsteps of the US Federal Reserve and the Bank of England. More surprising was the simultaneous announcement that it was intervening on the foreign-exchange market with the aim of reversing the appreciation of the franc. Will this be the first salvo in a war of competitive devaluations?
Interest rates are traditionally low in Switzerland. Like most other central banks confronted with the recession, the SNB has reduced its policy interest rate all the way to the zero lower-bound. Once there, traditional monetary policy is impotent as the interest-rate tool is no longer usable.
This is why central banks are now searching for new instruments. Quantitative easing represents one such attempt. It remains to be seen whether it can effectively restore some monetary-policy influence. However, an important issue is rarely mentioned: In small, open economies — a description that applies to almost every country except the US — the main channel of monetary policy is the exchange rate.
This channel is ignored for one good reason: Exchange-rate policies are fundamentally of the beggar-thy-neighbor variety. Unconventional policies that aim at weakening the exchange rate are technically possible even at zero interest rates, and they are quite likely to be effective at the level of individual countries.
Boosting competitiveness through exchange-rate depreciation may not succeed in raising exports in a situation where world trade is rapidly contracting, but it can cushion the blow by switching demand toward domestically produced goods and services.
The risk is that countries that suffer from the switch may retaliate and depreciate their currencies. That could easily trigger a return to the much-feared competitive depreciations that contributed to the Great Depression.
The first casualty would be whatever small scope remains for international policy coordination. The second would be the world international monetary system. In fact, one key reason for the creation of the IMF was to monitor exchange-rate developments with the explicit aim of preventing beggar-thy-neighbor policies.
This is why the Swiss move comes as a surprise. It is true that the franc has appreciated in real terms by 8 percent since the crisis started in August 2007. This is commonly attributed to the currency reputation as a safe haven during troubled times. What this really means is that the appreciation is neither a consequence of monetary policy nor the other usual factors. In any case, while the Swiss authorities' discomfort with the situation is understandable, their decision is disquieting.
The Swiss franc is not the only currency that has appreciated in recent months. Other small economies have undergone even sharper real appreciations. For example, Poland and the Czech Republic have seen their currencies go up by close to 30 percent and 15 percent, respectively. Major countries have also undergone currency appreciations — 30 percent for Japan and 15 percent for China.
These countries, too, are facing a recession, and, while the interest rate has not yet reached its zero bound everywhere, incentives to depreciate might grow in the near future. In fact, the incentives are already there. Some fairly large countries — South Korea, Sweden and the UK, to name a few — have already undergone some very large depreciations. In fact, Poland’s currency recently started to depreciate.
None of these countries' central banks has indicated that it was involved in depreciating its currency. Of course, statements and intentions may not be identical. It may be that the SNB merely acknowledges what other central banks do not. In doing so, however, the SNB is violating a taboo: “Thou shall not engage in competitive depreciations.”
Alternatively, it may be that the SNB mostly wishes to talk the franc down to break the safe-haven effect. Having promptly achieved depreciation, it may have succeeded. In that case, the franc will not move much more in any direction, and there will be no need for further interventions.
Nevertheless, the limited reaction to the SNB move is somewhat surprising. The move came one week after the IMF concluded its annual Article IV visit to Switzerland, and the report has yet to be released; it could make for unusually interesting reading.
Other central banks have not expressed any view, which may suggest that they do not intend to retaliate, at least at this stage. They may have been reassured by the SNB's official statement that the appreciation represented “an inappropriate tightening of monetary conditions,” and that the policy move merely aims “to prevent any further appreciation of the Swiss franc against the euro.”
It may also be that notice has been taken of the precedent, and that those authorities that intend to use it to justify future moves are loath to criticize it. In that case, the generalized silence could indicate that all other central banks entertain the possibility of using that option, which would be most worrisome.
Charles Wyplosz is professor of international economics and director of the International Centre for Money and Banking Studies at the Graduate Institute of International Studies, Geneva.COPYRIGHT: PROJECT SYNDICATE
Almost as soon as the plane carrying a US delegation led by US House of Representatives Speaker Nancy Pelosi took off from Taipei International Airport (Songshan airport) on Thursday, Beijing announced four days of live-fire military drills around Taiwan. China unilaterally cordoned off six maritime exclusion zones around Taiwan proper to simulate a blockade of the nation, fired 11 Dongfeng ballistic missiles and conducted coordinated maneuvers using naval vessels and aircraft. Although the drills were originally to end on Sunday, the Chinese People’s Liberation Army’s (PLA) Eastern Theater Command issued a statement through Chinese state media that the exercises would continue,
US House of Representatives Speaker Nancy Pelosi’s visit to Taiwan last week represented a milestone in Taiwan-US relations, but also pricked the bubble of the Chinese Communist Party’s (CCP) big lie that Taiwan is an inseparable part of China. During a speech delivered at the Presidential Office in Taipei on Wednesday, Pelosi said: “Forty-two years ago, America made a bedrock promise to always stand with Taiwan,” referring to the US’ Taiwan Relations Act of 1979. On the eve of her visit to Taiwan, Pelosi published an article in the Washington Post in which she stated that “America must stand by Taiwan.” With China
Despite political pressure at home to keep her from doing so, US House of Representatives Speaker Nancy Pelosi finally visited Taiwan last week, causing quite a stir. As Pelosi stuck to her guns, her visit was of considerable significance. Pelosi was born into the D’Alesandro political family. Her father, Thomas D’Alesandro Jr, was a US Representative and later mayor of Baltimore for 12 years. Pelosi was elected to the US House of Representatives at the age of 47 after her children were grown, and became the US’ first female House speaker in 2007 after the Democratic Party won the House majority.
In an August 12 Wall Street Journal report, Chinese sources contend that in their July 28 phone call, United States President Joe Biden was told by Chinese Communist Party (CCP) leader Xi Jinping (習近平) that “he had no intention of going to war with the US” over House of Representatives Speaker Nancy Pelosi’s then upcoming visit to Taiwan. However, there should be global alarm that Xi did use that visit to begin the CCP’s active war against democracy in Taiwan and globally, and that the Biden Administration’s response has been insufficient. To hear CCP officials, People’s Liberation Army (PLA) spokesmen, and a