Swiss Exchange Rate Appreciation and Domestic Economic Activity

The recent appreciation of the Swiss franc provoked opposition based on the conventional view that currency appreciations reduce domestic output. An alternative, supplyside view, however, is that an appreciating currency is evidence that policy changes have improved inflation, investment, productivity and output. This article reviews the two views, then shows that the Swiss evidence rejects the conventional hypothesis of a negative relationship between movements in a currency's value and output, based on tests of the existence of cointegrating relationships between measures of the exchange rate and various measures of output and productivity, as well as measures of nominal exports. Statistically significant long-run relationships are found that generally support the alternative view. Policies that boost investment, productivity and real income also raise the currency's value, so the latter rise has been a signal of enhanced prosperity instead of a cause of its demise.