Currency wars in the advanced world: Resisting appreciation at a time of change in central banking monetary consensus

The purpose of this paper is to consider certain consequences of large post-crisis capital flows in advanced economies. Specifically, I offer an examination of the Swiss response to large capital inflows during the early stages of the global financial crisis. Why did the Swiss National Bank (SNB) intervene in the foreign exchange market and introduce an exchange rate floor? Why did the SNB gamble with its highly valued anti-inflationary reputation in attempting to stem the appreciation of the Swiss franc? To answer these questions, this paper suggests a broader and more complete explanation than one that focuses solely on the configuration of domestic interests. Specifically, the paper argues that a thorough explanation of the SNB’s response requires accounting for the changing monetary paradigm of the central banking community. This emerging monetary paradigm influenced the SNB’s policy decisions by making the SNB particularly sensitive to financial stability risks and by providing it with the policy space to experiment with (macroprudential) tools to manage these risks.