The unexpected decision by the Swiss National Bank (SNB) on January 15, 2015, to discontinue its minimum exchange rate of 1.20 Swiss Francs (CHF) per euro sent ripples across global financial markets. This policy, implemented in September 2011 to protect the Swiss economy from the influx of safe-haven capital during the Eurozone crisis, had successfully stabilized the franc for over three years. However, the abrupt removal of this floor led to a dramatic surge in the value of Swiss Money Chf, appreciating by approximately 15% against the euro. This sudden appreciation created immediate challenges for Swiss exporters and retailers, forcing them to adapt to new price competitiveness dynamics.
A decade later, the “Swiss franc shock” remains a significant case study for economists and policymakers. It provides a unique real-world experiment to examine how exchange rate fluctuations influence pricing strategies, consumer behavior, and international trade in advanced economies – core topics in international economics. This article delves into the key insights derived from research on this event, exploring the multifaceted impacts of the swiss money CHF appreciation.
Exchange Rate Dynamics and Price Transmission: The Role of Swiss Money CHF
The 2015 Swiss franc event is distinctive for several reasons. Firstly, it broke a period of remarkable stability in the EUR/CHF exchange rate. Secondly, the magnitude of the exchange rate movement was substantial and persistent, exceeding typical short-term fluctuations observed in developed economies. The EUR/CHF rate plummeted by over 20% on the day of the announcement and remained about 15% lower by mid-2015. Finally, the real appreciation of swiss money CHF occurred within a stable Swiss economic environment, allowing researchers to isolate the impact of the exchange rate shock on prices and expenditure patterns, without the complications of concurrent income or financial disturbances.
Figure 1 The exchange rate, aggregate prices, and border prices by currency of invoicing
Alt: Figure 1: EUR/CHF exchange rate and price indexes illustrating the Swiss Franc shock impact on import and consumer prices, highlighting Swiss money CHF.
Research analyzing the immediate aftermath of the shock reveals varied responses in import prices based on invoicing currency. Imports invoiced in euros experienced a near complete pass-through, with border prices decreasing by roughly 12%. In contrast, imports invoiced in swiss money CHF saw a smaller price reduction of about 5%. This disparity underscores the crucial role of currency invoicing in determining the speed and extent to which exchange rate changes affect border prices, consistent with findings by Gopinath et al. (2010).
Furthermore, the pass-through to retail import prices was limited. Despite significant drops in border prices, retail prices for imported consumer goods in Switzerland only decreased by about 3% on average in the two quarters following the appreciation of swiss money CHF. Analysis of the heterogeneity in border price changes, driven by variations in euro invoicing shares, indicates that a one percentage point decrease in border prices led to only about a 0.55 percentage point reduction in retail prices for imported products after two quarters.
These findings suggest that even in a highly open economy like Switzerland, retailers and suppliers absorbed a considerable portion of the currency movement of swiss money CHF. This absorption dampens the impact of currency appreciation on overall inflation. Factors such as nominal rigidities, distribution network complexities, and strategic pricing decisions at both border and retail levels influence how quickly and fully exchange rate shocks are transmitted to consumer prices.
Consumer Spending and Export Behavior in Response to CHF Fluctuations
Despite the moderate decrease in retail import prices, Swiss consumers reacted to the stronger swiss money CHF by increasing their purchases of imported goods at the expense of domestic products. Figure 2 illustrates a notable rise in import shares shortly after the currency appreciation. Research indicates that this shift was more pronounced in product categories with a higher proportion of imports invoiced in euros. The variation in border price changes based on invoicing currency not only affected consumer import prices but also significantly impacted import expenditure patterns. This highlights that the currency of invoicing for imports has broader allocative consequences beyond its direct effect on border prices.
Figure 2 Import shares in total expenditures
Alt: Figure 2: Trend of import expenditure shares in Switzerland post-Swiss Franc shock, demonstrating consumer response to Swiss money CHF appreciation.
Conversely, the abrupt appreciation of swiss money CHF presented challenges for Swiss exporters, eroding their price competitiveness in international markets. Analyzing the variations in Swiss export prices and export values across industries, considering the currency of invoicing for border prices, reveals that industries with higher swiss money CHF invoicing shares experienced significantly weaker export growth in the two years following January 2015. This is attributed to the larger increase in foreign-currency denominated prices for these industries.
However, aggregate Swiss exports did not experience a substantial decline despite the considerable appreciation of swiss money CHF. Swiss exporters employed alternative strategies to mitigate the loss of competitiveness. One key adjustment was the systematic enhancement of product quality. Firms focused on upgrading the quality of their exported goods and streamlining their product lines by removing lower-quality items, thereby elevating the overall quality and perceived value of Swiss exports.
Distributional Impacts: Winners and Losers of Swiss Money CHF Appreciation
Further research has examined the uneven effects of the swiss money CHF shock across different segments of the Swiss population. Specifically, studies have investigated how various income groups responded to the currency appreciation. Data on household consumption and expenditure patterns, categorized by country of origin, show that lower-income households were more sensitive to the reduction in import prices. These households significantly increased their expenditure on cheaper imports, a phenomenon termed ‘unequal expenditure switching’. This heightened responsiveness meant that lower-income households experienced a greater reduction in their effective cost of living compared to higher-income households. In the immediate aftermath of the shock, this led to a temporary decrease in consumption inequality within Switzerland.
Figure 3 Aggregate import responsiveness and heterogeneity across incomes in Homescan data
Alt: Figure 3: Import responsiveness across income levels in Switzerland after the Swiss Franc appreciation, showing unequal impact of Swiss money CHF value change.
Geographical disparities also played a role in the impact of the swiss money CHF appreciation. Cross-border shopping emerged as a significant expenditure adjustment, particularly relevant in Switzerland due to its open borders and substantial price differentials with neighboring countries like Austria, France, Germany, and Italy. Regions bordering these countries witnessed considerable cross-border shopping activity, where Swiss residents took advantage of lower prices (approximately 30% lower on average). In these border regions, the cost of living decreased by an estimated 2.8% in 2015 following the Swiss franc appreciation, compared to a smaller reduction of 1.7% in regions further from the border.
Figure 4 Cross-border expenditure shares in 2014
Alt: Figure 4: Map of Switzerland showing cross-border expenditure shares in 2014, illustrating regional variations in response to Swiss money CHF and price differences.
These findings underscore that currency shocks can have significant distributional effects on the cost of living, impacting different income groups and geographical areas within a country unevenly, beyond just aggregate macroeconomic effects.
Policy Implications and Lessons Learned from the CHF Shock
Even a decade later, the “Swiss franc shock” provides valuable lessons for central banks and economic policymakers globally. For researchers, this event serves as a quasi-natural experiment, offering insights into key economic elasticities and adjustment mechanisms, including exchange rate pass-through rates at the border and to consumer prices, and the dynamics of expenditure switching.
The observed muted pass-through in Switzerland demonstrates that a stronger currency, like swiss money CHF, does not automatically translate into proportional decreases in consumer prices, both in the short and medium term. This highlights the complexities of price transmission and the role of various market frictions.
Household heterogeneity is also a critical consideration. Lower-income households, being more price-sensitive, can benefit disproportionately from cheaper foreign goods when swiss money CHF appreciates. Similarly, households in border regions can further capitalize on foreign price reductions through cross-border shopping.
The 2015 appreciation of swiss money CHF provides crucial insights that extend beyond this specific event. It offers a unique perspective on the microeconomic adjustment mechanisms and their influence on macroeconomic responses to exchange rate shocks. Economic models must incorporate factors such as currency invoicing practices, price rigidities, distribution channels, and expenditure switching behaviors to accurately analyze the impacts of exchange rate policy or monetary policy in a broader context.
References
Auer, R, A Burstein, K Erhardt and S M Lein (2019), “Exports and invoicing: evidence from the 2015 Swiss franc appreciation”, AEA Papers and Proceedings 109: 533–538.
Auer, R, A Burstein and S M Lein (2021a), “Exchange rates and prices: evidence from the 2015 Swiss franc appreciation”, American Economic Review 111(2): 652-686 (originally circulated as BIS Working Paper No. 751).
Auer, R, A Burstein and S M Lein (2021b), “Exchange rates, invoicing, and prices: Lessons from the Swiss franc surge of 2015”, VoxEU.org, 3 February.
Auer, R, A Burstein, S M Lein and J Vogel (2023), “Unequal Expenditure Switching: Evidence from Switzerland”, The Review of Economic Studies 91(5): 2572–2603 (originally circulated as BIS Working Paper No. 1001).
Bonadio, B, A M Fischer and P Sauré (2016), “Fast exchange rate pass-through”, VoxEU.org, 21 April.
Bonadio, B, A M Fischer and P Sauré (2020), “The speed of exchange rate pass-through”, Journal of the European Economic Association 18(1): 506-538.
Burstein, A, M Eichenbaum and S Rebelo (2005), “Large Devaluations and the Real Exchange Rate”, Journal of Political Economy 113: 742–784.
Burstein, A and G Gopinath (2014), “International prices and exchange rates”, in G Gopinath, E Helpman and K Rogoff (eds.), Handbook of International Economics 4: 391–451.
Burstein, A, S Lein and J Vogel (2024a), “Cross-border shopping: evidence and welfare implications for Switzerland”, Journal of International Economics 152, 104015.
Burstein, A, S Lein and J Vogel (2024b), “Cross-border shopping: evidence and welfare implications for Switzerland”, VoxEU.org, 4 November.
Freitag, A and S Lein (2023), “Endogenous Product Adjustment and Exchange Rate Pass-Through”, Journal of International Economics 140, 103706.
Gopinath, G, O Itskhoki and R Rigobon (2010), “Currency choice and exchange rate pass-through”, American Economic Review 100: 304–336.
Kaufmann, D. and T Renkin (2019), “Export Prices, Markups, and Currency Choice after a Large Appreciation”, IRENE Working Papers 19-07, IRENE Institute of Economic Research.
Nakamura, E and D Zerom (2010), “Accounting for Incomplete Pass-Through”, The Review of Economic Studies 77(3): 1192–1230.
Obstfeld, M and K Rogoff (2001), “The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?”, In B Bernanke and K Rogoff (eds.), NBER Macroeconomics Annual 2000, Volume 15: 339-412.
