The Effects of the Swiss Currency Floor on the Exchange Rate Pass-Through in Switzerland. A Structural VAR Analysis.

Sammanfattning: The Swiss Franc experienced a substantial appreciation following the financial and the Euro crises in 2008 and 2011. In response to deflationary pressures, the Swiss National Bank set an exchange rate floor of 1.20 Swiss Francs per Euro in September 2011. The floor was discontinued in January 2015. This study investigates the exchange rate pass-through to import and consumer prices in Switzerland, focusing on the period from 2000 to 2019 and on the Swiss Francs per Euro exchange rate. It further investigates the effects of the introduction and discontinuation of the floor on the pass-through. Using monthly macroeconomic data, the analysis is carried out with recursively identified vector autoregressive models. Pass-through effects are quantified through impulse response functions. A baseline analysis ignores the introduction and discontinuation of the floor, a second one analyses their effects on pass-through dynamics by means of an intervention model with time varying parameters. Baseline results show an incomplete but substantial exchange rate pass-through to import prices, a strong pass-through from import to consumer prices, but a weak exchange rate pass-through to consumer prices. Estimates of the intervention model reveal that, while no significant pass-through is found during the floor period, pass-through to import prices is the strongest after the discontinuation of the floor, while that of import prices to consumer prices the weakest. This suggests the floor having been effective in dampening deflation and the pass-through to consumer prices being primarily blocked by a weak pass-through from import to consumer prices after its discontinuation.