Volume 68-I The following articles were published in the first issue of the Aussenwirtschaft 2017. The contribution of monetary institutions to stability Harold James Abstract The modern development of a policy revolution in the late twentieth century that places monetary stability at the core of central banking functions has three roots: an academic discussion of the design of monetary policy institutions; the example of successful central banking practice; and the impact of policy spillovers in a world in which increased capital mobility shaped a new sort of globalization. The article examines the relative weight of these factors in building the modern conception of central banking, and how the three factors interact with each other. The problematical consequence of a globalization-induced change in approach is that the accidental success of modern monetary policy pushed a mode of thinking that made monetary policy central and left out traditionally central elements of central banking – in particular, financial supervision. The contribution of monetary institutions to stability: The Swiss case Ernst Baltensperger Abstract This article studies Swiss monetary policy of the 19th and 20th century to understand the Swiss Franc’s strength and stability. The continued appreciation against other currencies over the course of a century went hand-in-hand with Switzerland’s political and social consolidation as well as its increasing economic success. Political institutions arose from people’s beliefs and convictions, granting them credibility. In Switzerland, these institutions have been a major force in creating an environment that has permitted the Swiss National Bank to successfully pursue its course of monetary stability. Money demand: A simple look at some data Juan Pablo Nicolini Abstract In this paper, I offer a non-technical summary of recent research that focuses on the stability properties of real money demand. I first describe a simple workhorse model that serves as a conceptual framework for organizing the data and guiding the empirical analysis. Then, by using simple plots, I argue that the implications of the simple theory are remarkably robust over time. I do this for some developed economies with a history of relatively low inflation and for two developing economies that experienced severe hyper- inflation. Finally, we point toward several failures in this research and discuss avenues for future work. Long-run money demand in Switzerland Stefan Gerlach Abstract This paper studies long-run demand functions for Swiss M1 and M3, using annual data spanning the period 1907-2016. While the demand functions display plausible price and income elasticities, tests for structural breaks at unknown points in time detect instability in 1929 for real M1 and 1943 for real M3. This instability appears to arise from the way in which the opportunity cost is modelled. While using a single interest rate may be appropriate for M1, for M3 it would likely be helpful to take into consideration both the own return and the return on non-monetary assets. Long-run effects of exchange rate appreciation: Another puzzle? Marlene Amstad and Beatrice Weder di Mauro Abstract In the short to medium run, open economy textbook models predict that a real exchange rate appreciation shock negatively impacts macroeconomic performance. Over the long run, exchange rate appreciation and economic growth are predicted to be positively associated due to Balassa-Samuelson effects. In this case, the causality runs from growth to appreciation and exchange rate changes merely reflect underlying economic development, they are not driving them. This paper starts with a selective review of recent empirical literature, which is more ambivalent and suggests several reasons as to why the sensitivity to exchange rate appreciation shocks seems lower than predicted by theory. Reviewing the long-run association of appreciation and growth suggests that causality may also be at issue and raises another puzzle, particularly pronounced in Switzerland. Causes and consequences of long-run currency appreciation: The Swiss case Peter Kugler Abstract The econometric analysis of a panel of currencies after the transition to flexible exchange rates indicates that the real exchange rate of the Swiss franc against six major currencies is trend stationary and that the elasticity of the nominal exchange rate with respect to the relative price level is close to 1. Moreover, the dollar and pound real exchange rates appear unrelated to the GDP share of the Swiss financial sector over the years 1916-2010. This confirms previous findings for the pound and dollar for a currency panel during the flexible exchange rate period, namely, that the real appreciation of the Swiss franc in the flexible exchange rate period appears to be a “real” phenomenon not related to monetary and financial developments, and it mainly creates a risk for the stock of Swiss net foreign assets. Currency competition in Switzerland Michael D. Bordo Abstract The recent interest by many central banks in digital currency and the role of the central bank in possibly providing them and regulating them as well as the concern over privately issued crypto currencies like bitcoin, has resonance to the monetary history of many advanced countries in the early nineteenth century when multiple competing banks issued notes based on specie coins of varying quality. The currency history of Switzerland in the nineteenth century illustrates the evolution from competing banks of issue to the creation of the Swiss National bank in 1907 with a monopoly of the currency. The public good benefits of as central bank issued currency convinced the early classical economists on the basic role of central banks. Today the upsurge of privately produced crypto currencies with variable nominal and real values makes a case for the creation by central banks of their own digital currencies. A single investor of the current account surplus? Benefits and risks of a monopoly supplier of money in Switzerland Reto Foellmi Abstract Studying the currency competition episode in Switzerland of the 19th century, I argue that modern economies need a single supplier of money to pursue stabilization policy. In small open economies with integrated capital markets, the uncertainty about the real exchange poses new risks to monetary policy which were only little discussed in the previous literature. Missing link: The case of free trade between Switzerland and Taiwan Patrick Ziltener Abstract In the years after the conclusion of the Economic Cooperation Framework Agreement (ECFA) between Taiwan and the People’s Republic of China (PRC) in 2010, it became possible for countries that recognize the PRC to negotiate FTA-like economic agreements with Taiwan. Singapore and New Zealand took the lead in demonstrating that “effective economic representation” is possible “without touching upon sovereignty issues.” The Taiwanese new administration, led by Tsai Ing-wen, has confirmed its determination to make proactive use of this foreign economic policy instrument. For Switzerland, Taiwan is an economically significant missing link in its chain of FTAs in East Asia. This study assesses the potential benefits of mutual tariff abolition as part of a possible bilateral economic agreement between the WTO members Switzerland and Taiwan, taking into account the impact of the recently extended Information Technology Agreement (ITA). Taiwanese companies could envisage significant duty savings (of CHF9 million annually) in their exports to Switzerland, especially for metal goods, machinery, bicycles and motorcycles. Swiss exporters could profit even more, by up to US$47 million annually, especially for wrist watches (over $20 million), machinery and processed agricultural goods. Based on interviews with political actors, diplomats and civil servants in Taipei, the study concludes that there is a window of opportunity for Switzerland to complete its chain of FTAs in East Asia and to put an end to the (unintended) trade policy discrimination against Taiwan. There is a convergence of interests among all actors involved and there are no major obstacles for swift bilateral negotiations for the time being. Switzerland is well advised to take this chance to realize preferential market access for its companies before their main competitors in the Asia-Pacific area do the same. A study case on the caveats in the measurement of FTAs effect on trade: Switzerland’s free trade agreements Timothy Nussbaumer Abstract This paper analyses the effect of 20 of the 31 Swiss free trade agreements (FTAs) on Swiss trade flows, using disaggregated trade data for the period between 1993 and 2014. Applying the standard gravity model of trade, the impact of each individual FTA on Swiss exports and imports is estimated. Although the descriptive evidence suggests a positive impact of most FTAs, the estimation results at the disaggregated level are inconclusive. Taking Switzerland as a case study, this work points towards important methodological difficulties in the measurement of FTA effects on trade at the disaggregated level.