Possible effects of European Monetary Union on Switzerland

This paper examines the possible effects on Switzerland of asset preference shifts in favor of Swiss franc-denominated assets that could result from European Economic and Monetary Union (EMU). Alternative policy responses to temporary and persistent asset preference shifts and the consequent pressures for exchange rate appreciation are examined. Simulations of a stylized macroeconomic model of the Swiss economy indicate that monetary policy is likely to be the most effective tool for stabilizing output in the short run, but at the cost of a temporary increase in inflationary pressures. The simulations highlight the dilemmas faced by policymakers in an environment with low levels of inflation and nominal interest rates. (C) 2001 Society for Policy Modeling. Published by Elsevier Science Inc.