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Ten years after the Swiss franc shock: Lessons on prices, expenditure switching, and inequality

The 2015 Swiss franc appreciation provided researchers with a unique empirical setting for understanding how large exchange rate movements shape economic outcomes. This column discusses key findings about the response of firms and consumers. The relatively muted pass-through observed in Switzerland reveals that a stronger currency does not fully translate into proportionate reductions in consumer prices, either at short or medium horizons. Household heterogeneity is also a key theme – low-income households which are more price-sensitive can benefit disproportionately from cheaper foreign goods, while households near the border can further benefit by shopping abroad.

On 15 January 2015, the Swiss National Bank (SNB) unexpectedly abandoned its minimum exchange rate policy of 1.20 CHF per euro. Initially established in September 2011 to shield Switzerland’s economy from safe-haven capital inflows during the euro area crisis, the policy helped contain excessive franc appreciation for more than three years. Removing the currency floor triggered a sudden and sharp rise in the Swiss franc – by around 15% against the euro – sending shockwaves through financial markets and exposing exporters and retailers to immediate price and competitive pressures.

From a research perspective, ten years on, this ‘Swiss franc shock’ still stands as a unique natural experiment on how exchange rate movements affect prices, expenditures, and exporting behaviour in advanced economies, 1 which are classical themes in international economics (e.g. Obstfeld and Rogoff 2001, Burstein and Gopinath 2014). In this column, we summarise some of the key findings in our research and other work on this unique shock.

The shock and its pass-through to prices: Exchange rates, border prices, and consumer costs

The appreciation episode is unique in several ways. First, it followed a period of remarkable exchange rate stability (see Figure 1). Second, the exchange rate movement was large in magnitude relative to standard short-term exchange rate fluctuations in advanced economies and remarkably long-lasting: the EUR/CHF appreciated by more than 20% on the day of the policy change, and by 15% by mid-2015. And last, but certainly not least, the real appreciation also occurred against the backdrop of a stable Swiss economy, making it possible to identify the impact of the exchange rate shock on prices and expenditure switching without confounding income and financial effects.

Figure 1 The exchange rate, aggregate prices, and border prices by currency of invoicing

Figure 1 The exchange rate, aggregate prices, and border prices by currency of invoicing
Figure 1 The exchange rate, aggregate prices, and border prices by currency of invoicing
Notes: The figure shows the monthly EUR/CHF nominal exchange rate, core import price index, and consumer price index for imports and for domestic goods and services, all relative to December 2014.
Source: Auer et al. (2021a).

The Swiss franc shock affected both import and export markets. A first and immediate question regards how import prices reacted to the shock, which we analyse in Auer et al. (2021a) using border and retail price data.  2 We find that the border price responses varied strongly by invoicing currency. Imports invoiced in euros experienced an average price drop of about 12% at the border (i.e. almost complete pass through), whereas those invoiced in Swiss francs fell only by about 5%. 3 In line with Gopinath et al. (2010), this discrepancy underscores the role of currency invoicing in shaping how quickly – and how fully – exchange rate changes translate into border prices.

Second, there was limited pass-through into import retail prices. Despite notable border price declines, retail prices for imported consumer goods dropped by only around 3% on average two quarters after the appreciation. Leveraging heterogeneity in border price changes induced by variation in euro invoicing shares, we find that two quarters after the shock, a one percentage point larger reduction in import prices at the border resulted in a roughly 0.55 percentage point larger price reduction for imported products at the retail level.

These results show that, even in a small and open economy like Switzerland – where one might expect high sensitivity to external price changes – retailers and suppliers absorbed a substantial portion of the currency movement. This dampens the role of currency appreciation on inflation. Nominal rigidities, distribution bottlenecks, and strategic pricing at both border and retail levels 4 shape how swiftly and extensively exchange rate shocks reach consumer wallets.

The response of consumer expenditures and of firms’ exports

Despite the modest decline in retail import prices, consumers shifted their purchases toward imported goods and away from domestic products. As shown in Figure 2, import shares rose substantially even at short horizons after the appreciation. In Auer et al. (2021a), we show that this shift was more pronounced in product categories with a higher proportion of euro-invoiced imports. Specifically, the cross-sectional variation in border price changes by currency of invoicing impacts not only consumer import prices, but also import expenditures. In other words, currency of invoicing of imports has allocative implications well beyond its impact on border prices.

Figure 2 Import shares in total expenditures

Figure 2 Import shares in total expenditures
Figure 2 Import shares in total expenditures
Notes: The figure shows the evolution of import expenditure shares over the months in each year. Source: Auer et al. (2021a).

Conversely, for Swiss exporters, the sudden appreciation meant an erosion of price competitiveness. Exploiting cross-industry variation in the response of Swiss export prices and export values by currency of invoicing of border prices in the aftermath of the appreciation, in an earlier paper with Katharina Erhardt (Auer et al. 2019) we find that differences in border price adjustment by currency of invoicing – also documented in Kaufmann and Renkin (2019) – carry over to allocations. Specifically, industries with higher Swiss franc-invoicing shares (and hence a larger increase in foreign-currency denominated prices) experienced substantially weaker export growth in the two-year period after January 2015.

However, despite this, aggregate exports did not decline much, even in the face of a relatively large appreciation. As documented by Freitag and Lein (2023), one adjustment margin used by Swiss exporters to address their loss of competitiveness in export markets was the systematic improvement of product quality. Firms not only upgraded the quality of the goods they exported but also removed lower-quality goods from their product lines, thereby increasing the overall quality of their exports.

Unequal effects across consumers: Who benefits more from the appreciation?

In related work with Jonathan Vogel (Auer et al. 2023), we focus on heterogeneous effects of this shock across the Swiss population. First, we delve into how different income groups responded to the appreciation. By employing granular data on household consumption and expenditure patterns by country of production, we find that lower-income households were more price sensitive to the reduction in import prices, shifting more of their expenditure toward cheaper imports. We refer to this phenomenon as ‘unequal expenditure switching’. Because of this heightened responsiveness, lower-income households experienced a greater drop in their effective cost of living than higher-income ones. In the immediate aftermath of the shock, this led to a short-term narrowing of consumption inequality.

Figure 3 Aggregate import responsiveness and heterogeneity across incomes in Homescan data

Figure 3 Aggregate import responsiveness and heterogeneity across incomes in Homescan data
Figure 3 Aggregate import responsiveness and heterogeneity across incomes in Homescan data

Second, the appreciation also had heterogeneous effects across different geographic regions in Switzerland. This is because, as documented in Burstein et al. (2024a), expenditure switching also happened via cross-border shopping. This margin is very relevant in Switzerland, a small country with open borders and large cross-border price differences with Austria, France, Germany, and Italy. Especially in regions close to the border, households take advantage of lower (around 30% on average) cross-border prices and shop abroad. Based on our estimates, in areas near the border with significant cross-border shopping activity (see Figure 4), the welfare-relevant cost of living decreased by 2.8% in 2015 following the Swiss franc appreciation, compared to a reduction of only 1.7% in more remote regions (see Burstein et al. 2024b for further details).

Figure 4 Cross-border expenditure shares in 2014

Figure 4 Cross-border expenditure shares in 2014
Figure 4 Cross-border expenditure shares in 2014
Notes: Darker zip codes have higher cross-border shares in their total expenditures. Most of the Italian-speaking part of Switzerland, which accounts for approximately 4% of the total population, is not included in the Nielsen data.
Source: Burstein et al. (2024).

These results highlight that currency shocks can have important distributional effects on cost of living – not just aggregate impacts – across the income and geographic distribution.

Policy reflections in today’s context

Ten years later, the ‘Swiss franc shock’ still resonates with central banks and policymakers. For researchers, this natural experiment-like shock allows identification of key elasticities and adjustment margins such as the rate of pass-through at the border, the subsequent pass-through into import prices, and expenditure switching.

The relatively muted pass-through observed in Switzerland reveals that stronger currency does not fully translate into proportionate reductions in consumer prices, both at short and medium horizons.

Household heterogeneity is also a key theme. Low-income households who are more price sensitive can benefit disproportionately from foreign goods becoming cheaper, while households near the border can further benefit from foreign price reductions by shopping abroad. 

The 2015 appreciation reveals valuable insights extending far beyond the specific episode, offering a unique window into the relevant microeconomic adjustment margins and their role in shaping macroeconomic responses to exchange rate shocks. Economic models must take into account the details of invoicing currencies and price rigidities, distribution channels, and channels of expenditure switching when analysing the impact of exchange rate policy or monetary policy more broadly.

Source : VOXeu

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GLOBAL BUSINESS AND FINANCE MAGAZINE

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