The puzzle of the Swiss interest rate island: Stylized facts and a new interpretation

Arbeitspapier

This paper contributes to the debate about the puzzle of the Swiss Interest Rate Island. It starts out by establishing some stylized facts about the nature of the puzzle. First it shows that long run real returns on Swiss Euro Deposits have been significantly lower than in any other major currency. A decomposition of return differentials into deviations from uncovered interest rate parity and deviations from purchasing power parity reveals that the former contributes most to the puzzle. Two implications follow from these stylized facts: (i) since the puzzle is present in Euro Deposit rates it cannot be due to local factors such as banking secrecy, and (ii) solutions to the puzzle have to provide an explanation for a long run failure of uncovered interest rate parity rather than for real appreciation. Historical evidence is presented that suggests the puzzle may be attributed to a reverse peso problem. The paper discusses the consequences of this interpretation for Swiss monetary and exchange rate policy.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: HWWA Discussion Paper ; No. 168

Classification and Topics

• Classification: Wirtschaft ; International Financial Markets ; Interest Rates: Determination, Term Structure, and Effects ; Financial Markets and the Macroeconomy
• Subject: Realzins ; Zinsparität ; Kaufkraftparität ; Risikoprämie ; Schätzung ; Schweiz ; EU-Staaten ; Peso problem

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kugler, Peter ; Weder, Beatrice
• Event: Veröffentlichung
• (who): Hamburg Institute of International Economics (HWWA)
• (where): Hamburg
• (when): 2002

Further information

• Handle: http://hdl.handle.net/10419/19330
• Last update: 10.03.2025, 11:41 AM CET