0
$\begingroup$

From Treasury's Oct'2016 FX policies report:

Switzerland’s economic policy situation is distinctive given its relatively small stock of domestic assets, which limits monetary policy options to address persistent deflation in the context of significant safe haven capital inflows.

What is the link between stock of domestic assets and monetary policy options?

$\endgroup$
1
$\begingroup$

Monetary policy is conducted by the Swiss Central Bank. The Swiss Central Bank has a monopoly over the issue / production of Swiss francs.

The purpose of the Swiss Central Bank is to produce / supply Swiss francs to the Swiss public if the Swiss public wants to hold more Swiss francs and to purchase Swiss francs of the public if the Swiss public wants to hold fewer Swiss francs. If it doesn't bad things will happen but that's outside of the scope of this question.

The Swiss Central Bank does this by either purchasing domestic assets with newly created Swiss francs and selling domestic assets for previously created Swiss francs.

The reason that the Swiss Central Bank does this by purchasing and selling domestic assets is that it is often not appreciated if one country's government interferes in the economy of another country's government and the Swiss Central Bank is considered to be part of the Swiss State.

The problem the Swiss Central Bank faces is that the Swiss currency and Swiss domestic assets are considered to be good stores of value by foreigners. The function of a currency is a unit of account, store of value, and a medium of exchange. So the Swiss currency fulfills the second function, store of value, for foreigners. But this leaves fewer Swiss francs for the Swiss public to use as a medium of exchange. And if there are fewer Swiss francs but the demand of the Swiss public is the same, then this results in deflation. Swiss francs become relatively more valuable compared to other goods. The prices of other goods, in terms of Swiss francs drop. At the same time there are fewer domestic assets that can be exchanged for newly created Swiss francs because these have been purchased by foreigners.

This is highly simplified, but I hope that this answers your question.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.