Evan Soltas
Dec 24, 2013

How Did We Miss the Swiss?

Macroeconomists love Japan, but I'm not so sure that Japan loves macroeconomists. Since the 1990s, the country has been stuck in a sort of macroeconomics-museum display case for what happens when you let nominal-income growth die.

Now, I like the Japan example as much as anybody else, but there's a problem with doing lots of analysis on only one case: it's hard to exclude hypotheses for what is to blame for Japan's inability to resuscitate nominal growth.

Is it the fecklessness of the Bank of Japan? Japan's hot-and-cold fiscal policy? Deep structural issues? Some mix? With one example, you can't vary the monetary, fiscal, and structural conditions and see which countries end up in Japan's situation and those which don't.

We may be losing the Japan case soon, too -- thank you, Shinzo Abe and Haruhiko Kuroda -- although who knows if the EU ends up replacing it behind the display case. But I'm writing this post because I think we've ignored another economy that has spent decades with extraordinarily and persistently low nominal growth and overnight interest rates: Switzerland.

Over the last fifteen years there, NGDP growth has averaged 2.7 percent per year and CPI inflation has averaged 0.7 percent per year. CPI inflation has hit zero five times in fifteen years: in 1998-1999, 2004, 2007, 2009-2010, and 2012-2013. Inflation has been similarly low as measured by the GDP deflator.

The Swiss National Bank's monetary policy instrument, the 3-month LIBOR in Swiss Franc, has averaged 1.2 percent over those fifteen years. In fact, it hasn't been lifted above 3.5 percent in those fifteen years. The central bank has three times in a row -- in the late 1990s, the early 2000s, and now -- found it impossible to maintain even modest short-term lending rates without smothering nominal growth. Nominal growth seems to run in brief bursts, falling back to zero though only once below.

The Swiss central bank has an inflation target of "no more than 2% a year for the medium to long term," which sounds to me like a stricter version of the ECB's target. It formally adopted the target in 2000 but obeyed it beforehand.

The consequence of that framework is that the policy rate has been perpetually at or just above the zero lower bound. The last time I wrote about Switzerland, in fact, I was describing its effort to stop outright deflation by placing a ceiling on the foreign-exchange value of the currency. That effort has succeeded, and deflation is over, but there's no sign that the bank is going to be able to lift its policy rate soon.

It's funny that American economists reach for Japan to study an economy with ultralow interest rates and weak nominal growth. Switzerland is more like the U.S. than Japan could ever be.

Switzerland has flexible labor markets -- and, more generally, it's hard to claim that the country faces anything quite like Japan's structural problems. Yet it still has -- if by apparent choice -- spent fifteen years with the same problems of monetary policy locked at zero and sputtering nominal growth.

Almost nothing, as far as I can tell, has been written about Switzerland's place at the zero lower bound. The only things I can find are...two decade-old papers by a guy named Ben Bernanke. Well, at least I know one economist was watching. What happened to the Swiss wasn't missed.