۩ ╠ exchange rates and the policy of self-interest ╣ ۩
Charles Abloush
While the Swiss National Bank decided to cut interest rates recently announced that it will contribute to the "quantitative easing" walk in the footsteps of the Fed in the United States and the Bank of England. The most surprising announcement comes that coincided with the announcement of its intention to Bank intervention in the foreign exchange market in order to reverse the direction of the franc to rise. Will this be the first salvo in the war of competitive party to reduce the value of its currency?
The interest rates are usually low in Switzerland. Like most other central banks that found itself in the face of recession, had been initiated by the Swiss National Bank to cut interest rates to almost zero. Once you reach this level, the traditional monetary policy becomes impotent, as the tool is no longer the interest rate is valid for use.This is why central banks are now searching for new tools. Quantitative easing of these attempts. It remains to be seen whether the quantitative easing able to restore some of the impact of monetary policy. But there is an important issue that is rarely mentioned: namely, that the exchange rate is the main channel of monetary policy in small, open economies, a description that applies to almost every country except the United States.However, the decision-makers ignore this channel and for good reason: namely, that exchange-rate policies to achieve the self-interest at the expense of others. The non-traditional policies aimed at weakening the exchange rate are technically possible, even if interest rates declined to zero, and is likely to be effective at the level of individual countries. May not succeed enhance competitiveness by reducing the exchange rate to increase export rates in light of the rapid contraction of world trade currently, but that would cushion the blow by shifting demand towards goods and services produced locally.The danger here is that countries that suffer from the changeover was quick to retaliate and depreciate their currencies. This would easily lead to a return to competitive devaluation that contributed to the Great Depression.The first casualty would be all that remains of the area to coordinate policies and plans at the international level, and will be the global monetary system second victim. Indeed, one of the main reasons behind the creation of the IMF was to monitor developments in exchange rate policies in order to prevent the spread of achieving self-interest at the expense of others.For this reason, the Swiss move comes as a surprise. It is true that the real value of the franc has appreciated 8% since the crisis began in August / August 2007. This is due in general to the reputation of the Swiss franc as a safe haven during troubled times. This means in fact that this rise did not come as a result of monetary policy or other usual factors. In any case, despite the lack of satisfaction is understood by the Swiss authorities about the whole situation, the decision was puzzling.The Swiss franc is not the only currency that has appreciated in recent months. The currencies of other countries recorded a small rise more than a real unit. For example, the value of Polish currency by about 30%, and increased the value of the currency of the Czech Republic by 15%. Also saw the value of the currencies of major countries rises 30% for Japan and 15% for China.These countries also suffer from the recession, although interest rates have not yet amount to zero everywhere, but the incentives that could push those countries to devalue their currencies may grow in the near future. The fact that these incentives are already there. Even some fairly large countries like Korea, Sweden and the United Kingdom has already seen large reductions of the value of their currencies. As currency values began to decline in Poland recently.Did not mention any of the central banks in these countries to contribute to the devaluation of its currency. Of course the statements may not be identical to the real intentions. Perhaps the fact that the SNB, including not being recognized by other central banks. But the Swiss National Bank may have violated this taboo: "Thou shall not engage in competitive currency devaluation." Perhaps most of what he wishes the Swiss National Bank to succeed through the data and statements in carrying value of the franc down to break the safe-haven effect in the end. Indeed, he may have succeeded in achieving this goal already. In this case, the franc will not move much in either direction, thus eliminating the need for further interventions.However, the limited reaction to the step taken by the Swiss National Bank was somewhat surprising. The move came one week after the end of the International Monetary Fund for a visit to Switzerland in accordance with Article IV, and the report on this visit has not yet been released.Other central banks have not expressed any view in this regard, which may indicate that they do not intend to retaliate, at this stage at least. And perhaps reassured by the official statement issued by the Swiss National Bank, which confirmed that the high value of the Swiss franc was a "tighter is inappropriate to the circumstances of cash", and that this political move aims not only to "prevent further appreciation of the Swiss franc against the euro" .May be the fact that everyone has paid attention to this precedent, but that some are unwilling to criticize it intends to use it to justify further moves in the future. If so, this public silence may indicate that all the other central banks are considering the possibility of resorting to this option, which is a further reason for grave concern.* Professor of International Economics and Director of the International Center for Monetary Studies in Geneva, and the article is published with the order of "Project Syndicate"
Charles Abloush
While the Swiss National Bank decided to cut interest rates recently announced that it will contribute to the "quantitative easing" walk in the footsteps of the Fed in the United States and the Bank of England. The most surprising announcement comes that coincided with the announcement of its intention to Bank intervention in the foreign exchange market in order to reverse the direction of the franc to rise. Will this be the first salvo in the war of competitive party to reduce the value of its currency?
The interest rates are usually low in Switzerland. Like most other central banks that found itself in the face of recession, had been initiated by the Swiss National Bank to cut interest rates to almost zero. Once you reach this level, the traditional monetary policy becomes impotent, as the tool is no longer the interest rate is valid for use.This is why central banks are now searching for new tools. Quantitative easing of these attempts. It remains to be seen whether the quantitative easing able to restore some of the impact of monetary policy. But there is an important issue that is rarely mentioned: namely, that the exchange rate is the main channel of monetary policy in small, open economies, a description that applies to almost every country except the United States.However, the decision-makers ignore this channel and for good reason: namely, that exchange-rate policies to achieve the self-interest at the expense of others. The non-traditional policies aimed at weakening the exchange rate are technically possible, even if interest rates declined to zero, and is likely to be effective at the level of individual countries. May not succeed enhance competitiveness by reducing the exchange rate to increase export rates in light of the rapid contraction of world trade currently, but that would cushion the blow by shifting demand towards goods and services produced locally.The danger here is that countries that suffer from the changeover was quick to retaliate and depreciate their currencies. This would easily lead to a return to competitive devaluation that contributed to the Great Depression.The first casualty would be all that remains of the area to coordinate policies and plans at the international level, and will be the global monetary system second victim. Indeed, one of the main reasons behind the creation of the IMF was to monitor developments in exchange rate policies in order to prevent the spread of achieving self-interest at the expense of others.For this reason, the Swiss move comes as a surprise. It is true that the real value of the franc has appreciated 8% since the crisis began in August / August 2007. This is due in general to the reputation of the Swiss franc as a safe haven during troubled times. This means in fact that this rise did not come as a result of monetary policy or other usual factors. In any case, despite the lack of satisfaction is understood by the Swiss authorities about the whole situation, the decision was puzzling.The Swiss franc is not the only currency that has appreciated in recent months. The currencies of other countries recorded a small rise more than a real unit. For example, the value of Polish currency by about 30%, and increased the value of the currency of the Czech Republic by 15%. Also saw the value of the currencies of major countries rises 30% for Japan and 15% for China.These countries also suffer from the recession, although interest rates have not yet amount to zero everywhere, but the incentives that could push those countries to devalue their currencies may grow in the near future. The fact that these incentives are already there. Even some fairly large countries like Korea, Sweden and the United Kingdom has already seen large reductions of the value of their currencies. As currency values began to decline in Poland recently.Did not mention any of the central banks in these countries to contribute to the devaluation of its currency. Of course the statements may not be identical to the real intentions. Perhaps the fact that the SNB, including not being recognized by other central banks. But the Swiss National Bank may have violated this taboo: "Thou shall not engage in competitive currency devaluation." Perhaps most of what he wishes the Swiss National Bank to succeed through the data and statements in carrying value of the franc down to break the safe-haven effect in the end. Indeed, he may have succeeded in achieving this goal already. In this case, the franc will not move much in either direction, thus eliminating the need for further interventions.However, the limited reaction to the step taken by the Swiss National Bank was somewhat surprising. The move came one week after the end of the International Monetary Fund for a visit to Switzerland in accordance with Article IV, and the report on this visit has not yet been released.Other central banks have not expressed any view in this regard, which may indicate that they do not intend to retaliate, at this stage at least. And perhaps reassured by the official statement issued by the Swiss National Bank, which confirmed that the high value of the Swiss franc was a "tighter is inappropriate to the circumstances of cash", and that this political move aims not only to "prevent further appreciation of the Swiss franc against the euro" .May be the fact that everyone has paid attention to this precedent, but that some are unwilling to criticize it intends to use it to justify further moves in the future. If so, this public silence may indicate that all the other central banks are considering the possibility of resorting to this option, which is a further reason for grave concern.* Professor of International Economics and Director of the International Center for Monetary Studies in Geneva, and the article is published with the order of "Project Syndicate"
