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Life in a Two-Headed Monetary System: The Swiss Experience

50th Anniversary of the Bank of Israel, Jerusalem, 29.11.2004

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The birth of the euro has fundamentally changed the shape of the international monetary system. The euro now is a credible alternative to the dollar. It provides the counterweight to the U.S. currency that was missing in the past. This greatly benefits third currencies, such as the Swiss franc. Previously, in case of dollar weaknesses, investors turned their attention to the German mark and, even more so, the franc. Their status as safe-haven currencies meant that at times of foreign exchange turbulences they would move well beyond what economic fundamentals could justify. Today, when the dollar is under attack, investors no longer need to rush into the franc. Yet the euro/Swiss franc crossrate may come under upward pressure in such turbulent times, thus interfering with domestic monetary policy prerogatives. Europe, although to a somewhat lesser extent than the United States, is a fairly closed economy. It is much more capable than small open economies, such as Switzerland, to take the brunt of the adjustment. Furthermore, Switzerland is now surrounded by a monetary zone that shares essentially the same monetary policy goal, namely that of price stability. This further contributes to the external stability of the franc. On balance, the creation of the euro is thus very good news for Switzerland and other small countries that can now concentrate on their domestic needs. Our experience over the past few years has convincingly demonstrated that the Swiss National Bank continues to be able to charter an independent course, and thus to formulate a monetary policy that is custom made for Switzerland.