They indicate that a 10% appreciation of the Swiss nominal effective exchange rate causes Swiss franc export prices for capital goods to fall by 4%. Regression results provide formal evidence on the relationship between exchange rates and export prices. Sources: Swiss Federal Customs Administration and Swiss Federal Statistical Office. Note: Costs are proxied by the producer price index for capital goods. Swiss franc costs in the figure are proxied by the producer price index for capital goods.įigure 1 Swiss franc export prices and Swiss franc costs for the capital goods sector Figure 1 shows that, as the franc began appreciating at the end of 2007, Swiss franc export prices for capital goods tumbled relative to the Swiss franc costs of producing these goods. They can also compress the profit margins of exporters by forcing them to reduce their Swiss franc export prices. Exchange rates and the profitability of Swiss firmsĮxchange-rate appreciations can reduce the volume of exports. We also report that GDP increases in importing countries cause large increases in Swiss exports. The recent 30% appreciation of the exchange rate thus put significant downward pressure on exports of these medium high-technology goods. Thus, exports of specialised machinery, precision instruments, machine tools, and other goods produced using Swiss engineering are vulnerable to appreciations. For Swiss capital goods and equipment goods, on the other hand, we find that a 10% appreciation would reduce exports by 6%. We find no evidence that an appreciation of the Swiss franc would reduce exports of the most sophisticated products, watches and pharmaceutical products. This was two-to-five times higher than the corresponding values for the G7 countries. According to this approach, 53% of Swiss manufacturing exports in 2014 were classified as high-technology goods. The OECD categorises technology levels based on the ratio of research and development spending to value-added (see Hatzichronoglou 1997). Switzerland’s export structure is also sophisticated according to OECD measures. Watches and pharmaceutical products rank first and third, respectively, in terms of product sophistication, and 41% of Swiss exports in 2014 were in these categories. We find that Switzerland has the most advanced export structure in the world in most years according to both measures. To do this, we use the methods of Hausmann et al. We first examine the sophistication of Swiss exports.

In a recent paper, we investigate how exchange-rate changes affect Swiss exports and the profitability of Swiss firms (Thorbecke and Kato 2017). Thus, the price elasticity of demand for these goods should be low. Sauré observed that pharmaceutical products are often essential and covered by employees’ health insurance. In addition, as Sauré (2015) noted, the share of pharmaceutical goods in Swiss exports rose almost monotonically after 1989 and by 2011 exceeded 25%. As the IMF (2013: 18) stated, Switzerland’s “…exporting industries may be built around production of very specific items, which are particularly valued for their brands or special characteristics and hence face limited price competition”.

One might expect exchange rates to have a small impact on Swiss exports. How does the franc’s value affect Swiss exports and the Swiss economy? Thomas Jordan, chairman of the Swiss National Bank, reported that in June 2017 the franc remains significantly overvalued. In January 2015, the Swiss National Bank abandoned the floor and the Swiss franc soared. The real effective exchange rate then depreciated by 8% over the next quarter. In September 2011, the Swiss National Bank set a floor of 1.2 Swiss francs to the euro. Between the fourth quarter of 2007 and the third quarter of 2011, the Swiss real effective exchange rate appreciated by 30%. During the Global Crisis and the Eurozone Crisis, these inflows intensified. These factors make it attractive to investors in times of turmoil, and lead to safe-haven capital inflows. Switzerland produces sophisticated products, runs budget surpluses, maintains low inflation, possesses a strong currency, and excels at wealth management.

Swiss frank exchange rates