Exchange Rates and the Swiss Economy

Author Name Willem THORBECKE (Senior Fellow, RIETI) / KATO Atsuyuki (Research Associate, RIETI)
Research Project East Asian Production Networks, Trade, Exchange Rates, and Global Imbalances
Download / Links

This Non Technical Summary does not constitute part of the above-captioned Discussion Paper but has been prepared for the purpose of providing a bold outline of the paper, based on findings from the analysis for the paper and focusing primarily on their implications for policy. For details of the analysis, read the captioned Discussion Paper. Views expressed in this Non Technical Summary are solely those of the individual author(s), and do not necessarily represent the views of the Research Institute of Economy, Trade and Industry (RIETI).

Macroeconomy and Low Birthrate/Aging Population (FY2016-FY2019)
East Asian Production Networks, Trade, Exchange Rates, and Global Imbalances

Switzerland has an advanced industrial structure, relies on exports, and has experienced wide exchange rate fluctuations since the Global Financial Crisis. Switzerland thus has much in common with Japan.

We find that Swiss exports are the most sophisticated in the world according to two different measures over the 2001-2014 period. In addition, 53% of Swiss exports are classified as high technology goods based on the Organisation for Economic Co-operation and Development (OECD) criterion in 2014. How do exchange rates affect an economy that exports such advanced products?

Our regression analysis indicates that exchange rates do not affect aggregate exports while trading partners' real gross domestic product (GDP) does. To further investigate the relationship between exchange rates and exports, exports disaggregated into categories such as consumption goods, capital goods, pharmaceutical products, and watches are regressed on exchange rates and other variables. Pharmaceuticals and watches are both highly sophisticated, research-intensive goods. Table 1 indicates that exchange rates do not matter for exports of pharmaceuticals and watches but do affect exports of consumption and capital goods. Trading partners' GDP also affects exports of consumption goods, capital goods, and pharmaceuticals. The results in Table 1 indicate that the most sophisticated Swiss exports do not face significant price competition but that slightly less sophisticated products such as Swiss capital goods do. These findings are reinforced by examining exchange rate pass-through. An appreciation of the Swiss franc does not affect export prices for watches and clocks but lowers these for other products (see Table 2).

Our study also investigates how exchange rate changes affect Swiss stock returns. The result indicates that the financial services sector, the retail sector, the industrial machinery and diversified industrial sectors are significantly harmed by an appreciation of the currency. On the other hand, the pharmaceutical sector and the specialty retail sector (e.g., the sector that produces Swiss army knives) are not sensitive to exchange rate changes. This reinforces our earlier findings that firms producing sophisticated products are less exposed to exchange rate changes.

Table 1: Exchange Rate and Estimates of Switzerland's Exports to 14 Countries
All Goods
Consumption Goods
Capital Goods
Bilateral Real Exchange Rate -0.44***
Real GDP (ULC-deflated) 0.41
(Note) Exports in 14 countries are deflated by unit labor cost
*** (*) denotes significance at the 1% (10%) level, respectively.
Table 2: The Effect of Exchange Rate Changes on Swiss Franc Export Prices for Various Sectors
Sector Sum of Coefficients Standard Error
All Goods -0.40* 0.23
Watches & Clocks -0.29 0.27
Capital Goods -0.37** 0.15
Precision Instruments, Clocks & Jewelry -0.42* 0.23
Clothing -0.49 0.39
Consumer Durables -0.50* 0.27
Food -0.75*** 0.13
(Note)The values in the second column are the sum of the coefficients on the contemporaneous first difference of the nominal effective exchange rate (NEER) and lagged first differences of the NEER.
*** (**) [*] denotes significance at the 1% (5%) [10%] level, respectively.