Current Account Surpluses and the Interest Rate Island in Switzerland
IMF Working Papers, February 1, 1995
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- Current Account Surpluses and the Interest Rate Island in Switzerland
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Bibliographic details
- Authors: Paolo Mauro
- Published: February 1, 1995
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451844085.001
Summary
- Paper describes long-run aspects of the Swiss balance of payments.
- Highlights two distinctive macroeconomic phenomena:
- Persistent current account surplus and the largest ratio of net foreign assets to GDP in the world.
- Real interest rates in Switzerland have been significantly lower than those of most other industrialized countries, leading to the label “interest rate island”.
- Suggests these two features may be related and may ultimately result from an excess of national savings over investment for many years.
- Attributes much of the real interest differential to a foreign exchange rate risk premium, which compensates Swiss residents for holding net assets in foreign currency and compensates foreign residents for bearing net liabilities in Swiss francs.
Key findings and analysis
- Persistent current account surplus:
- Switzerland has recorded a persistent current account surplus.
- Switzerland has the largest ratio of net foreign assets to GDP in the world.
- Interest rate island phenomenon:
- Swiss real interest rates have been significantly lower than those of most other industrialized countries.
- The “interest rate island” label reflects this persistent real interest differential.
- Proposed linkage and underlying cause:
- Both the persistent surplus and low real interest rates may stem from an excess of national savings over investment over many years.
- The real interest differential may largely reflect a foreign exchange rate risk premium that affects returns on cross-border assets and liabilities.
Subjects and keywords (as listed)
- Subjects: Balance of payments, Current account surpluses, External position, Financial services, Foreign assets, Foreign exchange, Interest rate parity, Purchasing power parity, Real interest rates
- Keywords: balance of payments, Current account surpluses, deutsche mark, exchange rate risk, exchange rate risk risk premium, expected return, Foreign assets, foreign exchange, Global, Interest rate parity, Purchasing power parity, R&D spending, rate of return, real interest rate differential, Real interest rates, real interest rates in Switzerland, return on assets, surplus in Switzerland, Switzerland real interest rates, trade balance, trade pattern, trading partner, WP