The Swiss franc is known to appreciate strongly during financial market turmoil, demonstrating its status as a typical safe haven currency. One possible mechanism behind this appreciation during times of global turmoil is assumed to be higher capital inflows to Switzerland. This paper attempts to find some empirical evidence for this presumption. The analysis reveals that capital flow variables are not necessarily coincident with the movements of the Swiss franc. Interest rate differentials, a traditional determinant of exchange rates, co-move only weakly with Swiss franc movements. However, a robust and stronger link between variables that capture global or regional market uncertainty and movements of the Swiss franc is observed. Specifically, the information channel rather than new cross-border investment is found to be coincident with the Swiss franc. The weak link between capital flows and the exchange rate is confirmed to some extent for some other countries.
The Swiss franc is known to appreciate strongly during financial market turmoil, demonstrating its status as a typical safe haven currency. One possible mechanism behind this appreciation during times of global turmoil is assumed to be higher capital inflows to Switzerland. This paper attempts to find some empirical evidence for this presumption. The analysis reveals that capital flow variables are not necessarily coincident with the movements of the Swiss franc. Interest rate differentials, a traditional determinant of exchange rates, co-move only weakly with Swiss franc movements. However, a robust and stronger link between variables that capture global or regional market uncertainty and movements of the Swiss franc is observed. Specifically, the information channel rather than new cross-border investment is found to be coincident with the Swiss franc. The weak link between capital flows and the exchange rate is confirmed to some extent for some other countries.
We draw on a new data set on the use of Swiss francs and other currencies by European banks to assess the patterns of foreign currency bank lending. We show that the patterns differ sharply across foreign currencies. The Swiss franc is used predominantly for lending to residents, especially households. It is sensitive to the interest rate differential, exchange rate developments, funding availability, and to some extent international trade. Domestic lending in other currencies is used, to a greater extent, in cross-border lending, and for lending to resident nonfinancial firms, and is much less sensitive to the drivers identified for Swiss franc lending. Policy measures aimed at foreign currency lending have a clear impact on lending to residents. The results underline that not all foreign currencies are alike when it comes to foreign currency bank lending and the associated financial stability risks.
We draw on a new data set on the use of Swiss francs and other currencies by European banks to assess the patterns of foreign currency bank lending. We show that the patterns differ sharply across foreign currencies. The Swiss franc is used predominantly for lending to residents, especially households. It is sensitive to the interest rate differential, exchange rate developments, funding availability, and to some extent international trade. Domestic lending in other currencies is used, to a greater extent, in cross-border lending, and for lending to resident nonfinancial firms, and is much less sensitive to the drivers identified for Swiss franc lending. Policy measures aimed at foreign currency lending have a clear impact on lending to residents. The results underline that not all foreign currencies are alike when it comes to foreign currency bank lending and the associated financial stability risks.
As it has proved difficult to explain the recent US house price boom on the basis of fundamentals, many observers have emphasised the role of speculation. This kind of argument is, however, indirect, as speculation is treated as a deviation from a benchmark. Our paper identifies house price expectation shocks directly, using a VAR with sign restrictions. House price expectation shocks are the most important driver of the US house price boom. We also show that a model-based measure of changes in price expectations leads a survey-based measure. Our baseline specification leaves the question of whether expectation shifts are realistic or unrealistic unanswered. In alternative specifications, we provide evidence that expectation shifts during the boom were largely unrealistic.
The US financial crisis and the later eurozone crisis have substantially impacted capital flows into and out of financial centers like Switzerland. We focus on the pattern of capital flows involving the Swiss banking industry. We first rely on balance-of-payment statistics and show that net banking inflows rose during the acute phases of the crises, albeit with a contrasting pattern. In the wake of the collapse of Lehman Brothers, net inflows were driven by a substantial retrenchment into the domestic market by Swiss banks. By contrast, net inflows from mid-2011 to mid-2012 were driven by large flows into Switzerland by foreign banks. We then use more detailed data from Swiss banking statistics which allow us to differentiate the situation across different banks and currencies. We show that, during the US financial crisis, the bank flows cycle was driven strongly by exposures in US dollars, and to a large extent by Swiss-owned banks. During the eurozone crisis, by contrast, the flight to the Swiss franc and move away from the euro was also driven by banks that are located in Switzerland, yet are foreign-owned. In addition, while the demand for the Swiss franc was driven by both foreign and domestic customers from mid-2011 to early 2013, domestic demand took a prominent role thereafter.
In this paper, we propose a modification of the three-pass regression filter (3PRF) to make it applicable to large mixed frequency datasets with ragged edges in a forecasting context. The resulting method, labeled MF-3PRF, is very simple but compares well to alternative mixed frequency factor estimation procedures in terms of theoretical properties, finite samle performance in Monte Carlo experiments, and empirical applications to GDP growth nowcasting and forecasting for the USA and a variety of other countries.
According to economic theory, the intertemporal budget constraint of households implies that a permanent increase in wealth should have a positive effect on consumer spending. Given the comparatively strong increase in Swiss household wealth over the past few years, the question of the extent to which changes in wealth influence expenditures of households has become of special interest for Switzerland. In this paper, I show that while the link among consumption, wealth and income was quite strong from 1981 to 2000, it has been very unstable since 2001. This fact suggests that the gap among the three variables, i.e., the deviation from long-run equilibrium, that has opened over the last few years is less likely to close. The results apply to aggregate wealth effects as well as to separate financial and housing wealth effects. Furthermore, I document several fragility issues related to the use of the cointegration approach to estimating wealth effects. These issues highlight the importance of carefully checking the robustness of the results, instead of looking just at one cointegration estimation method and only one time period. They also highlight the need for a non-cointegration approach to estimating wealth effects.
This paper empirically evaluates the predictive performance of the International Monetary Fund's (IMF) exchange rate assessments with respect to future exchange rate movements. The assessments of real trade-weighted exchange rates were conducted from 2006 to 2011, and were based on three state-of-the-art exchange rate models with a medium-term focus which were developed by the IMF. The empirical analysis using 26 advanced and emerging market economy currencies reveals that the 'diagnosis' of undervalued or overvalued currencies based on these models has significant predictive power with respect to future exchange rate movements, with one model outperforming the other two. The models are better at predicting future exchange rate movements in advanced and open economies. Controlling for the exchange rate regime does not increase the predictive power of the assessments.Furthermore, the directional accuracy of the IMF assessments is found to be higher than market expectations.
Foreign economic activity is a major determinant of export development. This paper presents an indicator for now- and forecasting exports, which is based on survey data that captures foreign economic perspectives. We construct an indicator by weighting foreign PMIs of main trading partners with their respective export shares. For two very trade exposed countries (Germany and Switzerland) the paper shows that the indicator based on foreign PMIs is strongly correlated with exports (total as well as goods exports). In an out-of-sample forecast comparison we employ MIDAS models to forecast the two different definitions of exports. We document that our export indicator performs very well relative to univariate benchmarks and relative to other major leading indicators using hard and soft data.
